Deepa Das Acevedo, '16: Research Proposes 'Shadow 401(k)s' In Response to Retirement Crisis

As today’s working Americans approach retirement, a crisis is looming. Many will lack the financial resources to be comfortable after they retire. To confront this issue, Deepa Das Acevedo has proposed a plan that would help workers navigate this crisis. In a new article titled “Addressing the Retirement Crisis with Shadow 401(k)s” in the Notre Dame Review Online, she envisions a universally available, federally administered, portable 401(k) plan and annuity purchase that would alleviate some of the challenges faced by workers.

Acevedo is a Sharswood Fellow at Penn Law who writes and researches on employment law and new work models. In her research, she uses social science methods, including ethnographic fieldwork, to better understand changing employment relationships in the sharing economy. Acevedo holds a PhD in anthropology from the University of Chicago and a JD from the University of Chicago Law School.

According to Acevedo, the retirement crisis isn’t just one complex problem — it’s actually two. First, most Americans aren’t saving aggressively enough for retirement, which will lead to them having insufficient funds when they finally do retire. And second, whether they’ve saved enough for retirement or not, most Americans aren’t properly managing — or sometimes even capable of managing — their savings when they do retire.

Acevedo identifies three reasons for the lack of saving: bad worker defaults, bad employer incentives, and low income. In other words, the current system doesn’t give workers the best incentives to save, it doesn’t encourage employers to help workers save, and it doesn’t matter if the system does either if workers don’t have any money to save.

One option, Acevedo suggests, is to authorize the Social Security Administration to create what she calls “Shadow 401(k)s.” She refers to them as “shadow” because “they’re meant to follow workers of all types throughout their professional lives, and also because they aren’t the main event or a one-size-fits-all solution to the retirement crisis.”

These federally administered — thought not federally guaranteed — defined contribution plans would have the kind of default enrollment mechanisms and age-appropriate fund selection addressed in the Pension Protection Act of 2006, she explains, as well as a default annuity purchase at retirement.

“Essentially, this approach encourages workers who lack employer-sponsored plans to save more than they pay in Social Security taxes, but spares them from having to select, establish, and maintain a plan themselves,” she writes.

And by using the Social Security Administration’s existing infrastructure, the plan would minimize administrative expenses without causing political debates on taxes.

The Shadow 401(k) could also address aspects of the management problem, she notes, which include poor decision-making before retirement, a lack of basic capacity and financial literacy, and trouble with decision-making while coping with physical or mental decline.

Many workers trigger what are called “leakages” — withdrawals before retirement — from their 401(k) accounts, Acevedo explains. These happen in times of financial hardship, or when they shift from one job to another and cash out their 401(k) plan. The Shadow 401(k) avoids the problem of workers having to make financial decisions — and possibly making bad ones — when they change jobs because the Shadow 401(k) follows them throughout their working life.

Acevedo notes that assessing financial progress and adjusting investment practice to match are “complex issues even for bright, educated, and financially literate folks, but the ungraceful truth is that many Americans lack the ability to tackle such problems.”

One survey she cites found that 16 percent of respondents couldn’t answer a basic question about percentages, one-third failed a question on division, and nearly 80 percent did not understand the concept of compound interest.

Cultural notions of responsibility also influence financial practices, she writes. For some, helping relatives in need outweighs saving for retirement, while for others, owning property may be the primary concern.

The Shadow 401(k) system, Acevedo explains, involves fewer decisions during a worker’s career and “mitigates the disparity between those who value saving and those who prioritize other things.”

But even if workers make all the right decisions and save enough money for retirement, they still must then manage their finances while facing the risks of physical and mental deterioration that come with aging, including memory loss and cognitive impairment.

Features of the Shadow 401(k), Acevedo explains, such as the default annuity purchase, mean “that retirees with memory loss needn’t go through this process every year unless, at retirement, they are so actively involved in managing their finances that they elect out of the annuity purchase.”

Yet for all of its potential benefits, the Shadow 401(k) is a stepping stone, not a permanent solution, she explains.

“This problem will not disappear,” she writes, “until we ask ourselves what workers need to earn so that they can cover both present spending and retirement saving in the way our system demands.”

To address the retirement crisis, she concludes, we must be open to multiple solutions that bring about incremental change — solutions that include plans like the Shadow 401(k).