|
Policy Framework
In recent decades, families have shown a steady decline in their ability to weather a financial emergency. A study released by the National Bureau of Economic Research in 2011 estimated that about one-quarter of Americans lack the capacity to cover an unexpected expense by coming up with $2,000 within 30 days. An additional 19 percent would do so by relying, at least in part, on pawning or selling possessions or taking payday loans.
Although the personal savings rate has increased recently, it is not clear whether this apparent return to thrift will endure beyond the present economic downturn. Meanwhile, research shows that consumers, particularly lower-wage workers, understand the importance of saving for emergency expenses. However, many lack access to savings plans or structures to enable them to begin saving. Others may worry about high banking fees or the safety of savings deposits. Or they simply fail to overcome the inertia that keeps them from entering a bank lobby and choosing from an array of savings products.
The workplace is a promising asset-building delivery channel that has been underutilized to facilitate savings for non-restricted, emergency use. The AutoSave model has the potential to change this. AutoSave is a savings mechanism that automatically diverts, through payroll deduction, a small amount of an employee’s post-tax wages into a savings account. A pilot of this model is now testing varied approaches to savings plan enrollment that leverage the power of default choices — simplified options with certain decisions already made on behalf of the employee, such as the type of savings account product and the suggested saving level. AutoSave streamlines account opening, minimizing the need for consumer decision-making or paperwork. Once initiated, savings deposits are made automatically by the employer each pay period, until the employee decides to stop or separates from the employer. Importantly, the pilot is also exploring (and will possibly test) the feasibility of implementing a design that goes one step further in making a default choice — to automatically enroll employees in the savings plan unless they opt out.
Both of these approaches to enrollment — automatic (“opt-out”) enrollment and streamlined, “opt-in” enrollment — have shown great promise to increase worker participation in employer-sponsored savings plans. However, most research in this area has been limited to large firms. Moreover, it suggests that there is much yet to learn about how best to facilitate and encourage lower-income workers to save. AutoSave’s experience is illustrating how workers in varied workplace settings, and at varied levels of earnings, react to default saving mechanisms.
Unlike most existing workplace saving programs, which focus on building retirement assets, AutoSave savings are intended to be fully liquid and available both to cover short-term needs and, potentially, to increase attachment to mainstream financial services or to serve as building blocks to longer-term asset accumulation. Although federal and state governments support a variety of programs and policies to encourage saving, most are focused on long-term goals, such as retirement, and have consequent restrictions on use and penalties for withdrawals. In addition, lower-wage workers receive little or no benefit from incentives to save that are embedded in the tax code. Currently no systematic savings program or policy exists to intentionally encourage non-restricted saving for the short term.
To address low levels of savings and retirement preparedness among American workers, the Automatic IRA Act (a bill reintroduced in Congress in September 2011) has proposed the widespread use of workplace-based, automatic enrollment of workers into individual retirement accounts. This approach has been met with support across the ideological spectrum. Although it targets retirement saving rather than short-term saving, Automatic IRA has key elements in common with AutoSave. Both initiatives would focus on making it easier for individuals to begin saving. As payroll-based savings plans, they maximize efficiency by relying on an existing infrastructure — direct deposit — to deliver the benefit. And to accommodate changes in household financial conditions, both plans allow participants to adjust their contribution level or opt out at any time. Given these similarities, the AutoSave pilot may provide insights into how Automatic IRA might perform among low- and moderate-income workers, in a variety of workplace sizes and settings.
Agenda, Scope, and Goals
An initial pilot of AutoSave is being operated in collaboration with the Asset Building Program of the New America Foundation, which first formulated the AutoSave concept. The pilot has yielded insights about the following questions about AutoSave’s feasibility:
- What does it take for employers to implement an easy-enrollment, automatic deduction savings plan, and why do they choose to do so? For example, do employers view AutoSave simply as an employee benefit or as a means to reach other goals, such as increasing employees’ overall use of direct deposit rather than paper paychecks?
- Are financial institutions able to offer a remote (workplace-based) account opening process; shorter, simpler account opening forms; and a suitable savings account product with low or no fees? How do financial institutions decide whether to offer an AutoSave plan?
- What does it take to enroll individual employees in an AutoSave plan? What proportion of employees participate, and what characteristics do they have? What factors influence employees’ decisions about whether and how much to participate? Once employees have signed up, do they continue, and are they able to accumulate an account balance over time?
- Overall, can the AutoSave approach be implemented well in a variety of workplace settings? What are the logistical and legal considerations involved in doing so? What potential does the model hold to address both employers’ workforce stability goals and employees’ financial goals?
Based on the initial pilot experience, the project may be expanded to a larger-scale, experimental study of the impact of participation in AutoSave. Such a study could measure whether the AutoSave intervention increases personal savings rates; reduces the use of alternative, high-priced credit options; increases the use of direct deposit and mainstream financial services; improves job attendance, performance or retention; or increases family financial stability and asset accumulation.
Design, Sites, and Data Sources
In each AutoSave pilot site, an employer has collaborated with a bank or credit union to design and implement an AutoSave plan that: allows employees to open a savings account without leaving their workplaces; streamlines the process of opening the account; and establishes regular, automatic deposits into it. Contributions are made with direct deposit transfers, from (post-tax, take-home) payroll into AutoSave accounts. The federally insured, low- or no-cost accounts are structured to both encourage saving and not penalize a saver who needs access to funds. Workers have control of their savings and are able to withdraw money at any time without penalty. The entire enrollment process is designed to minimize or eliminate common barriers to participation — including inertia, indecision about how and how much to save, concerns about the safety or accessibility of funds, and time-consuming enrollment steps.
The initial pilot employers include: a Southern California distribution warehouse for a national drugstore chain; a small for-profit light industrial firm and a nonprofit provider of vocational training and computer refurbishing, both located in New York City; a nonprofit human services agency located in the Midwest; and selected departments of two large municipal employers, located on the east and west coasts. More than 300 employees in these work sites have volunteered to participate in AutoSave.
MDRC is collecting the following information about program implementation and participation:
- Data from employers on the numbers and types of employees who enroll in AutoSave and on the amounts of their savings contributions
- Data from financial institutions on AutoSave account activity over time, including deposits and withdrawals
- Interview and focus group responses by employees, employers, and financial institutions
- In one employer site, additional survey data on the income and saving habits of enrollees
What's Next
In 2012, the project seeks employer partners to test the feasibility of implementing automatic, “opt-out” enrollment of employees into AutoSave.
|
|
