Morningstar Researchers Weigh In on Hypothetical Federal Retirement Plan

In late 2022, a bipartisan group of U.S. senators introduced a retirement savings proposal to expand coverage to workers without employer-sponsored savings through a federal retirement plan, including automatic enrollment and a federal match for low-and moderate-income workers.

Since then, and after the senators reintroduced the bill in 2023, the Retirement Savings for Americans Act has been cited as an example of a federal push into the 401(k) space that might undercut the mostly private system—especially if it includes a federal match. Those opponents have found the proposal particularly vexing, as it comes just a few years after two sweeping legislative packages designed, in part, to increase access to workplace savings plans and eventually provide a federal Saver’s Match to lower-income workers.

Supporters, meanwhile, have continued to champion the act as a way to help cover some 40 million Americans without access to a workplace plan, including gig workers, and give them accounts they can carry through life and potentially pass down to future generations. They also point to the example of state-facilitated individual retirement plans, which have built up some $1.8 billion in worker savings to date, according to the Georgetown University Center for Retirement Initiatives.

On Thursday, Morningstar Inc. retirement researchers Jack VanDerhei and Spencer Look released a deep dive asking the question: What would happen if the country implemented the RSAA?

In a blog post linked to the research, Look, associate director of retirement studies at Morningstar, summed up the findings: “While the proposal may sound promising, our research shows that most Americans would be better off under the current system.”

Analyzing Hypothetical Outcomes

The pair got to this finding by using their recently created Morningstar Model of U.S. Retirement Outcomes. Using the model, they plugged in five scenarios that reflect “potential but realistic changes to investors’ savings behavior and retirement plan sponsor behavior” if the RSAA was enacted. They then matched those scenarios to “status quo” anticipated results from the current retirement system.

After running those comparisons, VanDerhei, Morningstar’s director of retirement studies, and Look came to two main findings. First: The majority of workers would end up with better retirement outcomes sticking with the status quo. Second: While the RSAA would boost retirement outcomes for workers not covered by an employer-sponsored plan, the benefit would be offset by “larger decreases for those covered in the status quo.”

“This occurs because the RSAA would likely crowd out the private retirement plan market to some extent by subsidizing contributions for lower-income workers,” the researchers wrote. “Moreover, net contribution rates are typically lower under the RSAA, as contribution rates in [DC] plans—even for lower-income workers—are often much higher than the 3% default. The RSAA could also reduce IRA contributions, as workers may view the federal plan as equivalent to an employer-sponsored plan.”

The effect would be particularly harmful, according to the model, when considering the median wealth ratios at retirement for the scenarios: The model showed that wealth could decrease by as much as 20% for Generation Z workers and 12% for Millennial workers.

New Administration

Now that the White House will soon be occupied by a second Donald Trump administration, potentially working with a Republican-led Congress, the bill would face a different political map. But according to a fact sheet on its release, it was backed by a bipartisan group with a list of supporters including the Bipartisan Policy Action Center, Economic Innovation Group, Goldman Sachs’ 10,000 Small Businesses Voices, Uber and Doordash.

But the broader point the researchers wanted to make is that, to expand access and use of retirement plans, it will take a “balanced approach between public and private retirement systems to ensure that any policy changes support, rather than undermine, long-term retirement savings.”

The research did find positives outcomes from the RSAA for some groups. That includes workers nearing the end of their contributing years—those with one through nine more years before retirement—as they would generally benefit from the RSAA. It could also be a boon for industries in which employers do not tend to offer workplace retirement plans.

But for workers with at least 10 potential years of participation in a defined contribution plan, the results of the RSAA led to worse theoretical outcomes, particularly if workers are saving for at least 20 years.

“The potential trade-off between benefiting one group and potentially harming another is complex,” VanDerhei wrote via email. “While it’s true that some individuals may benefit from the proposed changes, it’s important to consider the potential negative consequences for a larger group. For instance, those who lose access to employer-sponsored plans will miss out on valuable benefits like personalized guidance and employer matching contributions. Additionally, a decline in overall retirement savings could have broader economic implications.”

Generational Wealth

The RSAA is not just about offering a federal plan. It includes design elements such as portability, so accounts could stay with a worker throughout their life; accounts as the sole property of the worker, so assets could be passed down; and investment options like low-cost target-date funds and index funds.

Despite these potential advantages, VanDerhei and Look’s analysis found that, while the RSAA program may lift up some, it would, in aggregate, reduce total U.S. workplace savings. The model accounted for things such as a 20% opt-out rate by workers, based on data from state automatic individual retirement account programs. It also looked at five different scenarios to try and account for different responses by workers and employers.

While the duo noted that “many factors” contribute to why the RSAA would reduce retirement resources and savings for many Americans, the key reason they shared is “that the enactment of the RSAA would likely lead to fewer employers sponsoring DC plans.” It could also lead to less savings, based on a 3% default rate, lower-than-average deferral rates with employers and the potentially lower match.

VanDerhei and Look’s prior research had certainly not advocated in favor of the current U.S. retirement system. In a report released in July, the team’s model showed that about 45% of Americans will run short of money in retirement if they retire at the traditional age of 65.

“There is a retirement crisis … for those who do not or are unable to participate in a defined-contribution plan,” the researchers concluded.

Thursday’s release shows that, according to their modelling, the RSAA is not the answer.