Why it's so hard for Americans to save for retirement

More than 35 years after he revolutionized the way Americans plan for retirement, Ted Benna is still trying to make it easier for people to save.

Benna, who is sometimes called the father of the 401(k), has lamented the shortfalls of the system he helped create when he pointed employers to a provision in the tax code that allows workers to set aside pretax earnings for retirement.

Today too many people are reaching retirement age with a paltry account balance that is unlikely to carry them through their later years. Illness, job loss and other emergencies can force people to tap their nest eggs sooner than expected. And millions of Americans, about one in two workers, still don't have an easy way to save for retirement.

With his latest work, Benna, 75, is trying to tackle the issue of access. The former benefits consultant has released a guide for small-business owners that points them to little-known tools to make it easier for employees to save for retirement - all while keeping their costs and liabilities low.

His efforts are playing out as House Republicans are considering a key change to 401(k)s as part of their tax overhaul package: Taxing the money that workers place in their savings plans upfront instead of years later when they take it out in retirement.

Meanwhile, lawmakers, states and small businesses are experimenting with ways to expand access to retirement accounts, which some say is the biggest obstacle of people saving enough for retirement.

Why is it still so hard for Americans to save for retirement?

Benna and other experts who have studied ways to help Americans feel financially secure in retirement shared their view. We spoke with Mark Iwry, a former Treasury official who helped define programs meant to encourage people to save through auto-enrollment in retirement plans. Teresa Ghilarducci, an economics professor at the New School for Social Research in New York and a longtime consumer advocate, says the current system needs to be replaced with something that reduces the burden on workers.

Here is what they had to say:

Retirement accounts are complicated.

When Benna first started trying to persuade employers to use a 401(k), the accounts were supposed to supplement pension income. Instead, many employers tried to save money by freezing or eliminating pensions, making the 401(k) the main retirement plan. In 2015, only 5 percent of employers offered traditional pensions to new hires, down from about half in 1998, according to the benefits consultant Willis Dowers Watson. The trend shifted the risk and the burden of preparing for retirement to the worker.

As the accounts rose in popularity, they also grew more complicated, Benna said. The original 401(k) had two investment options and could be explained in less than a minute, he said: "It was simple and it was attractive."

Today, the accounts require ordinary workers to make sometimes complicated investment decisions and to wade through layers of fees charged by financial firms and advisers.

"It morphed into something that got ugly," Benna said. "With that added complexity came a lot of added cost."

People tend to procrastinate.

Many people saving for retirement don't take advantage of a force that could offer a tremendous advantage: time. Thanks to the power of compound interest, or the ability of small investment gains to add up over time, people who start squirreling away money earlier can save smaller amounts than people who begin saving later in life. For every dollar you don't save in your 20s, you need to save three or five dollars in your 50s and 60s to make up the difference, depending on how stocks and other investment markets perform.

But in many ways, the system runs contrary to human nature, Ghilarducci says. It's not easy for people who are worried about establishing their careers, starting families and paying off debt to plan for retirement.

"People don't act like Excel spreadsheets," she said. About one in five workers reach their late 50s and early 60s with no money saved, according to estimates from the Federal Reserve.

Consumer advocates and retirement experts say the way to get more people to save is twofold. The first step is to give everyone access to a retirement account. The next is to make it seamless for people to sign up.

Workers are much more likely to participate in a savings plan when their employers automatically enroll them. Iwry saw the power of automatic enrollment firsthand nearly 20 years ago. Workers who didn't want to contribute to a retirement account could opt out or reduce their contribution rate at any time. So people have to take action to avoid saving, Iwry says. "We've enlisted inertia on the side of saving," he says.

At some companies, the share of workers who were participating in the retirement plan increased to about 90 percent with automatic enrollment, Iwry says. Participation also rose among some groups that were least likely to use a retirement account, including African Americans, Latinos, women and low-wage workers.

Half of workers are left out.

People who do not have access to a plan at work can open an individual retirement account on their own, but few people ever get around to it. Workers who have access to a retirement plan through their jobs are 15 times as likely to save for retirement, according to AARP.

People who work part-time or who work for a small business are less likely to receive a retirement plan through their jobs.

Several states have stepped in by passing laws that would create state-run retirement accounts. Under many of the models, states would automatically enroll workers into IRAs or create a retirement marketplace for small businesses that don't have plans. The efforts have faced resistance from some business groups and Republican lawmakers who say they are worried that the programs may encourage employers to drop their existing retirement plans.

Now Benna is trying to make it easier for small businesses to offer retirement plans by bringing renewed attention to the payroll deduction IRA, which allow workers to contribute to an IRA directly from their paychecks.

"The major barriers for a lot of smaller employers are complexity, cost compliance and fear of liability exposure," Benna says.

Employers wouldn't need to do much in addition to setting up the payroll deduction similar to the way that they allow workers to have their paychecks split among several checking accounts. In each of Benna's models, the worker is responsible for opening the account and determining how the money should be invested. Employers do not shoulder any liability.

Incentives don't match those who need them the most.

The tax code is the government's main tool for encouraging people to save for retirement. Workers don't need to pay taxes on the earnings they put into a retirement account such as a 401(k) and the investments grow tax-free until retirement. But not all workers benefit equally by using these accounts, Iwry says. A person in the 25 percent tax bracket, for instance, saves about 25 cents in income taxes for every dollar saved. Someone in the 10 percent tax bracket saves only a dime.

If policymakers want to encourage more low-income and middle-income workers to save, they need to offer incentives that will benefit them, Iwry said. Currently, the tax credit applies only to single people with income up to $31,000 and married couples with income up to $62,000. The credit maxes out at $1,000, but most people who qualify receive much smaller amounts, he said.

And despite the benefits of auto-enrollment, Ghilarducci said that any plan that makes participation voluntary is still likely to fall short. "Imagine if Social Security were voluntary and you sat around when you were 18 trying to determine if you should pay the [payroll] tax," she says.

Ghilarducci says policymakers should create a system that requires workers to contribute a minimum amount to a retirement account that could supplement their Social Security income. Workers would receive lifetime benefits that vary based on how long they worked and how much they've contributed, similar to a pension. But unlike a pension, workers would not be promised a set dollar amount, she says.

The benefits paid off every year can be based on the performance of the investments in the retirement account. Ghilarducci said her proposal has been held back by the same challenges hindering retirement savings overall. Just as individuals are less likely to save until they're close to their golden years, lawmakers and industry groups may drag their feet on crafting a solution until the retirement crisis is full blown.