Senator Daniel Akaka (D-HI) has introduced legislation that would encourage federal workers to save at least five percent of their pay in the Thrift Savings Plan.
Dubbed the Save More Tomorrow Act of 2012, the legislation follows the private sector model of automatic enrollment in 401(k) plans to encourage higher savings and participation rates. It builds upon the Thrift Savings Plan Enhancement Act of 2009 under which all federal employees are automatically enrolled in the TSP (unless they opt out) by increasing the default employee contribution rate in the 2009 Act of three percent of basic pay to at least five percent.
The bill would authorize the Federal Retirement Thrift Investment Board to pair the current auto enrollment of three percent of pay with an automatic escalation of one percent per year for at least two consecutive years after the first year of an employee’s enrollment in the TSP.
The private sector model being mirrored in this bill is the one established under the Pension Protection Act of 2006, legislation which encouraged companies to automatically enroll their employees in 401(k) plans at no less than a three percent savings rate and automatically escalate the rate by at least one percent per year for at least three years.
In a statement, the Senator said, “The Save More Tomorrow Act will make it easier for new TSP participants to save for retirement. Pairing automatic enrollment with automatic escalation in 401(k) plans has proven effective in increasing private sector savings rates. Congress should incorporate this best practice into the TSP.”
The Save More Tomorrow Act would only increase the savings rate for new federal employees who enroll in the TSP but do not raise their contribution rate enough to reach the goal Congress set of having most federal employees contributing at least five percent of basic pay. Currently about nine percent of federal workers under FERS and enrolled in the TSP contribute less than five percent, so the bill is mostly targeting that group to increase their contributions.
Studies have shown that automatic enrollment encourages greater investment in a retirement savings program such as the TSP. Professors Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA said in a statement, “Automatic enrollment is a great way to help people overcome inertia and start saving for retirement, however many employees get stuck at that initial 3 percent rate and stay there. This proposal will encourage Federal employees to gradually increase their saving rates by 1 percent a year, while maintaining everyone’s flexibility to opt out. This option, common in private 401(k) plans, is an important improvement to offer Federal employees.”
Akaka also hopes that the legislation would encourage lower income federal workers to save more for retirement. He noted in a statement that lower income workers are the ones who can least afford to forego saving for retirement, yet are the most likely to not contribute to their TSP plans. He said that this group of workers often cites automatic enrollment in the program as the main reason they are participating.
“Fortunately, the vast majority of the Federal employees are responsibly saving for retirement, exhibiting average savings rates that are far greater than the private sector. However, I am concerned that the most financially vulnerable Federal employees, individuals earning less than $25,000 a year, are saving at a lower rate that will hinder their ability to retire with dignity. We should build on the success of the Thrift Savings Plan Enhancement Act by making it as easy as possible for employees to increase their contributions,” said Akaka.