Payroll Deduction Wonders
My daughters have been receiving an allowance since they were each around 4 years old. It gets divided three ways: spend, save and give. “Spend” and “save”
are fairly obvious. “Give” is set aside all year, and, around this
time, we collect the final sum, provide a parental “matching
contribution,” and the girls pick a charity meaningful to them
to receive their donation.
It’s always amazing for them to see the pool of money at
the end of the year. In their eyes, it appears out of nowhere; after
all, they were automatically enrolled into this charitable giving
program, and a matching contribution somehow has been made.
So when it’s time to use the money, they are pleasantly surprised.
Both elementary school-aged, they are already learning
about what lies at the heart of the success of the employer-sponsored retirement plan—payroll deduction. They never see the
money, never get to touch it and can’t inadvertently put it into
another financial category.
Payroll deduction is yet another example of participants’
want and need that we talk so much about—as is the case with
automatic enrollment and automatic escalation features. This
practice is why the retirement success of Americans hinges on
access to a retirement plan at work—and why there have been
bipartisan initiatives to allow for open multiple employer plans
(MEPs), also why many states are now implementing or examining a payroll deduction state-run program.
Without the opportunity to “touch” the money, employees
put it aside and it grows without interference. This concept of
payroll deduction and putting money aside before the earner
sees it is also why the concept of leakage challenges the industry
so much. Most people who have ever gone through a retirement
plan rollover can attest to the challenges of having checks cut
to them and having to move the money themselves from one
account to the next.
At our PLANADVISER National Conference (PANC)
in October, we had a session that discussed the concept of
whether the nation faces a retirement crisis. With data from
the Employee Benefit Research Institute (EBRI) and panelists
Lew Minsky, president and CEO of the Defined Contribution
Institutional Investment Association (DCIIA), and Tim Rouse,
executive director of The SPARK Institute, the panel shared and
discussed research that showed the real crisis is not for those
with access to a plan at work, but for those without.
EBRI recently studied the accumulation phase of people
up to the age of 64, taking into account not only their defined
contribution plans but also their defined benefit (DB) plans,
individual retirement accounts (IRAs), Social Security and
housing equity. The data found that making plans available to
employees is critical in savings success. Participants who have
been eligible to participate in their DC plan for 20 years or more,
and have done so, are on a pretty solid trajectory to not run out of
money in retirement. EBRI projects that 94.7% of these folks in
the highest income quartile, 87.7% in the third quartile, 71.3%
in the second quartile and 35.9% in the lowest-income quartile
will have adequate financial resources in retirement.
This sentiment about the value of workplace plans was
echoed by PANC panelist Bob Reynolds in his new book, “From
Here to Security: How Workplace Savings Can Keep America’s
Promise.” In it he talks about the value of the current system
and the need to protect it.
Of the near 40% of Americans lacking access to a payroll
deduction savings plan, according to the Pew Research Center,
their retirement replacement rates are approximately half of those
for Americans with access to a defined contribution plan at work.
As a plan sponsor, you are a vital part of the savings programs
and retirement security of the country. Keep up the good work,
and remember that, for most of your employees, it’s because of you
that they will amass any sort of savings in their lifetime.
Albert Einstein said compounding was the eighth wonder
of the world. At least in retirement plans, perhaps payroll deduction is the ninth.
Payroll deduction is yet another instance
of the do-it-for-me participant want and
need that we talk so much about.