Proposed law aims to help Americans save more for retirement—but could end up hurting Gen Z, millennial workers

Legislators have long hoped to help more Americans save for retirement. One solution on the table: the Retirement Savings for Americans Act.

The bipartisan legislation, introduced to Congress in 2023, would create a federal workplace retirement account for workers, similar to a 401(k). Like other workplace retirement accounts, this plan would come with tax advantages and give investors the choice to invest in a menu of mutual funds, including target-date and index funds.

Such a plan would undoubtedly improve outcomes for those who wouldn't have otherwise have access to workplace retirement accounts, a recent study from Morningstar finds.

But the legislation would come with a major unintended consequence: a decrease in long-term wealth for many young working Americans. Researchers say the majority of working Americans would be better off with the current system.

Overall, under the RSAA, Morningstar's model estimates that wealth by retirement age could decrease by up to 12% for millennials and 20% for Gen Z workers.

What's on the table

Here's a quick rundown of the proposals:

• Automatic enrollment: Full- and part-time workers without access to an employee-sponsored plan would be automatically enrolled in the program and contribute 3% of their income. Anyone can choose to opt out.
• Matching tax credit: Workers under a certain salary threshold would be eligible for a "match" in the form of a federal tax credit. Uncle Sam would match 100% of contributions to the plan up to 3% of your salary and 50% of what you put in up to 5% of your salary.  
• Ownership: The account would be the property of the worker, who would retain control regardless of job switches.

However, a federal alternative would likely lead many private businesses to reduce their retirement plans or eliminate them entirely, researchers say. That would force more workers into a government plan, which, as written, would come with lower contribution rates than many current workplace plans.

And while certain workers without access to a 401(k) currently stash savings in an individual retirement account, many would be less likely to do so if defaulted into a government plan, says Spencer Look, associate director of retirement studies at Morningstar Retirement and the study's co-author.

"A lot of people would think of this federal plan as their [only] plan," he says. "If this was enacted, there'd be a lot of media coverage, there'd be a lot of information out there, so people would likely be less likely to be saving to an IRA."

How Morningstar's model can help you become a better investor now

Morningstar's calculations factor in a key behavior among investors: inertia. Most people who find themselves contributing to accounts at a default level, for instance, are unlikely to actively find ways to up their contributions or to seek out additional ways to save.

It comes down to a cognitive bias which keeps humans attached to the status quo, says Brad Klontz, a certified financial planner, financial psychologist and author of "Start Thinking Rich."

Evolutionarily, people are wired to avoid risk and prefer things the way they are, he says. "For much of human history, things are kind of OK the way they are right now. So we have an aversion to making changes."

When it comes to saving for retirement, though, change is a good thing. If you don't have a workplace plan, for instance, you'd be wise to start saving in an IRA. Likewise, if you start out by contributing a small, default amount to a retirement account, you'll build wealth faster by increasing your contributions over time.

It's important, then, to get inertia working in your favor, says Klontz. Remember: A body at rest tends to stay at rest, and a body in motion tends to stay in motion.

"Do as much automation as you can do," says Klontz. "Automation is the status quo hack."

For investors, that means setting up automatic transfers from your paycheck or checking account into retirement accounts. It means setting your 401(k) contribution to climb by one or two percentage points per year — a move that you likely won't feel in your budget, says Klontz, but that will drastically increase your wealth over time. It could also mean continuously selling your expensive investments and buying cheap ones by setting your portfolio to automatically rebalance to your preferred allocations on a regular basis.

Once you've done all that, you can safely return to a status quo that's working for you, says Klontz: "What's so cool about it is that you only need to make the choice once."

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