The proposed law aims to assist Americans in saving for retirement but may negatively impact Gen Z and millennial workers.

The Retirement Savings for Americans Act is a proposed solution that legislators have long hoped would help more Americans save for retirement.

In 2023, a bipartisan bill was introduced to Congress that proposes the creation of a federal workplace retirement account for employees, similar to a 401(k). This plan would offer tax benefits and allow investors to choose from a variety of mutual funds, including target-date and index funds.

A recent study from Morningstar shows that such a plan would definitely enhance the results for those who wouldn't have had access to workplace retirement accounts otherwise.

The proposed legislation could result in a decrease in long-term wealth for many young working Americans, according to researchers, who suggest that the current system is more beneficial for the majority of working Americans.

Under the RSAA, Morningstar's model predicts 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:

• The program would automatically enroll full- and part-time workers who do not have an employee-sponsored plan, requiring them to contribute 3% of their income. However, individuals have the option to opt out.
• Federal tax credit: Workers earning below a certain salary would receive a "match" in the form of a tax credit. Uncle Sam would match 100% of contributions to the plan up to 3% of your salary and 50% of what you contribute up to 5% of your salary.
• The worker would retain control over the account, regardless of job switches, making it their property.

A federal alternative to private retirement plans could result in many businesses reducing or eliminating their retirement offerings, forcing workers into a government plan with lower contribution rates.

If defaulted into a government plan, many workers without access to a 401(k) would be less likely to save for retirement in an individual retirement account, according to Spencer Look, associate director of retirement studies at Morningstar Retirement and the study's co-author.

"If this federal plan were enacted, there would be extensive media coverage and a wealth of information available, making it less likely for people to save to an IRA."

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

Morningstar takes into account the behavior of investors, specifically inertia, which refers to the tendency of individuals to maintain their current level of contribution to accounts without actively seeking ways to increase it.

Brad Klontz, a financial planner, psychologist, and author of "Start Thinking Rich," explains how a cognitive bias keeps people clinging to the current situation.

Throughout our evolutionary history, we have a tendency to avoid risk and prefer things to remain the same, according to him.

Though saving for retirement may seem daunting, it's important to remember that change can be beneficial. If you don't have a workplace plan, consider opening an IRA. Additionally, starting with a small, default contribution to a retirement account and gradually increasing your contributions over time can help you build wealth faster.

To get inertia working in your favor, as Klontz suggests, keep in mind that a body at rest tends to remain at rest, and a body in motion tends to stay in motion.

"As much automation as possible is recommended by Klontz," states the expert. "Automation is the current standard practice."

To increase wealth over time, investors should set up automatic transfers from their paycheck or checking account into retirement accounts, gradually increase their 401(k) contribution by one or two percentage points per year, and regularly rebalance their portfolio to preferred allocations by automatically selling expensive investments and buying cheap ones.

What's great is that you only need to make a decision once.

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