The Thrift Savings Plan, or TSP, used by members of Congress and federal employees, offers appealing features, such as low fees, simplicity, and sensible investment options. A new CAP Action report finds that American workers would be much better off saving in a TSP-style plan than in a typical 401(k) plan.
Washington, D.C. — Nearly one-third of nonretired Americans have no retirement savings or pension, and one way to bolster the private retirement system would be to allow workers to access a retirement program modeled after the Thrift Savings Plan accessed by members of Congress and all federal employees. A new analysis released today by the Center for American Progress Action Fund finds that workers would see vastly improved retirement security by saving in an TSP-style plan compared with saving a typical 401(k) plan. The TSP was utilized by more than 4.8 million current and former federal employees as of October 2015.
“The Thrift Savings Plan is used by millions of federal employees, including members of Congress, to help ensure a secure retirement—and with good reason. The TSP offers simple, easy-to-understand, and sensible investment options and low fees,” said David Madland, Senior Fellow at CAP Action and Senior Advisor to CAP Action’s American Worker Project. “When workers do not have access to a retirement plan at their workplace, either because their employer does not offer one or because of the nature of their work, they are unlikely to save for retirement. Expanding access to a TSP-style plan, such as CAP Action’s National Savings Plan, could help shore up our private retirement system–which is currently failing to meet the needs of a significant part of our workforce–and offer a more secure retirement to millions of Americans.”
CAP Action’s report lays out the contours of a new proposal called the National Savings Plan, or NSP, which would expand access to TSP-style retirement plans for workers who otherwise do not have access to a workplace retirement plan. The report also models the impact of the proposal. CAP Action’s analysis, based on a worker earning a typical salary and contributing 12 percent of his or her pay each year starting at age 30 and retiring at age 67, finds that a worker saving in the NSP would be approximately 2.3 times more likely to have a secure retirement—defined as replacing 70 percent of preretirement income with retirement savings and Social Security—than a worker contributing the same amount to a typical 401(k) plan.
To have the same likelihood of a successful retirement as the NSP offers, this hypothetical saver would need to have a 52 percent higher annual contribution in a typical 401(k) compared with the NSP—18.2 percent of pay compared with 12 percent. A small-business worker with an even higher-fee 401(k) plan would be 5.2 times more likely to maintain his or her standard of living in retirement by saving in the NSP than in an employer’s plan.
CAP Action’s new analysis was released on a news conference call with Sen. Jeff Merkley (D-OR). Sen. Merkley today introduced the American Savings Act, legislation that would establish a new low-fee savings plan to give all Americans whose employers do not help them save for retirement access to the same simple and effective retirement savings and investment options that are already available to federal employees.
“It shouldn’t matter whether you work part time or full time, as an employee or as a contractor, or for a huge corporation or a tiny business: Every American worker deserves access to a financially secure retirement,” said Merkley. “With private-sector pensions becoming rarer and rarer, Social Security and retirement savings are more important to retirement security than ever, which is exactly why we must strengthen Social Security and expand high-quality retirement savings options to all workers. This plan helps millions of American workers save easily and automatically for retirement with tax benefits, rock-bottom fees, and the same types of high-quality investment options already enjoyed by federal workers and members of Congress.”
Sen. Merkley’s proposal would let all workers who do not otherwise have access to an employer-sponsored retirement plan save pretax income toward retirement, up to $18,000 per year. According to Merkley’s office, American Savings Act accounts would give workers access to the same investment choices currently offered to federal workers through the federal TSP. The default option will save 3 percent of a worker’s income in a Lifecycle fund that automatically shifts to safer investments as the worker nears retirement.
A retirement plan modeled after the TSP plugs a number of holes in the existing retirement savings system, which has been insufficient for many American workers. Such a proposal would ensure a portable retirement option available to all Americans, including contractors, freelancers, and others that have no access to a workplace retirement plan. As the report notes, some states—such as California, Illinois, and Oregon—have already taken significant steps to establish accounts for workers without access to workplace retirement plans.
Click here to read “Improving Americans’ Retirement Outcomes Through the National Savings Plan” by David Madland, Alex Rowell, and Rowland Davis.
For more information on this topic or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.