WASHINGTON, D.C. – U.S. Senator Daniel Akaka (D-Hawaii) introduced the Save More Tomorrow Act of 2012 to build on efforts to incorporate private sector best practices into the Thrift Savings Plan (TSP), which is the tax-deferred retirement savings plan for Federal employees, similar to a 401(k) plan.  This act would promote the goal Congress previously established of encouraging workers in the Federal Employees’ Retirement System to save at least five percent of their pay in the TSP.  

Senator Akaka 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 builds on the Thrift Savings Plan Enhancement Act of 2009.  Under the 2009 Act, all new Federal employees are automatically enrolled in the TSP unless they opt out.  The Save More Tomorrow Act would adjust the TSP’s automatic enrollment mechanism from the current default employee contribution rate of three percent of basic pay, increasing the contribution rate by one percent per year to at least five percent. 

The impetus for the 2009 Act was the Pension Protection Act of 2006, which encouraged private sector employers to offer a default option for 401(k) plans pairing automatic enrollment with automatic escalation.  Both laws were passed by large, bipartisan majorities in Congress.  Since the enactment of the Pension Protection Act, studies have found that offering such a default escalation option in 401(k) plans is very effective at increasing employee savings rates, particularly for lower-income workers.      

Leading economists, including the creators of the ‘Save More Tomorrow’ concept, Professors Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA, have endorsed Senator Akaka’s bill.  In a statement, Professors Thaler and Benartzi said: “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.” 

“Automatic contribution escalation is an important complement to automatic enrollment which was incorporated into the TSP in 2010,” said Professor Brigitte Madrian of the Harvard Kennedy School, who is an expert on retirement savings plans.  “Automatic enrollment has successfully increased participation in the TSP; automatic contribution escalation will further help those TSP participants who have benefited from automatic enrollment but who have limited means to save today by automatically and gradually increasing their contributions over time until they are taking full advantage of the employer match.”

Senator Akaka’s introductory statement in the Congressional Record is available here: LINK