The Mexican Retirement Savings System (SAR) is a solid and well-focused system, which offers innumerable advantages over the previous retirement model in Mexico. So much so that Mexican Afores were recently rewarded worldwide for their good investment strategies, and the recent 2019-2020 reforms have further strengthened it. However, it is a model that is constantly evolving, so it is worth reviewing what successes other countries have had in terms of retirement and retirement.
What can we learn from what was done recently in the United States? The 2021 version of our report How America Saves points out that one setting that could work well is making it easier for workers to save for retirement with automated investment strategies.
In the United States there is a trend in which companies offer their employees retirement plans with automated strategies in which employees do not necessarily have to decide when and how to participate or designate amounts to invest. This is where an important facilitator of this, the Life Cycle Funds, comes into play.
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Precisely one of the modifications that were made in Mexico with these recent reforms was to establish that the Afores invest workers’ resources in Life Cycle Funds, establishing 10 of these funds, also known as generational funds; Before, the five basic Siefores were based on Target Risk Funds.
Life Cycle Funds are the option that most American workers use to save for their retirement, currently 99% of retirement savings plans in the United States offer these funds, a significant increase from 82% in 2011 .[1]
This choice occurs because one of the main characteristics of the Life Cycle Funds is that they have an automatic investment strategy that adjusts their risk profile and investment percentages by types of assets as the worker’s retirement date approaches. For example, investing more in equities during the first years and preferring fixed income towards the end of the life of the fund.
These automatic adjustments avoid some inefficiencies that we previously saw in Mexico, when Afores had to move resources from one basic Siefore to another, when the workers reached a certain age. These movements, although planned and executed with precision and efficiency, had a cost and an impact on Afores and savers, so it is positive that they have been eliminated.
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In addition to the above, professionally managed generational funds, as is the case in Mexico with Afores and which is becoming widely popular in the United States, allow the money from each individual account to always be invested in the most efficient way for the benefit of the individual. hard-working, all in a simple and practical way. Thanks to this trend, American workers have increasingly better diversification and less extreme exposure to equities in their retirement plans.[2]
These multiple advantages are being especially taken advantage of by the youngest workers in the United States. To exemplify this: 75% of our users with a defined contribution retirement plan who invest their savings in a single Life Cycle Fund are under 35 years of age.[3]
What about voluntary savings?
It is undoubtedly the pending issue in Mexico and a point that has not been strengthened with the past reforms, since individual accounts with voluntary contributions in the country are still few. Going forward, it would be worthwhile to analyze an automatic voluntary savings modality where, for default, the employer takes an additional percentage to the one established by the law of the worker’s salary and deposits it in his Afore as voluntary savings or in a personal retirement plan, with the understanding that the worker may request his withdrawal from this service at any time automated.
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This voluntary automation works very well, since experience indicates that virtually no one decides to get out of these automatic modalities; and it is the best way to combat the lack of foresight and other obstacles that savers face in starting a voluntary savings plan.
What has been seen in the United States indicates that plans with automatic enrollment modality have more than tripled between 2007 and 2020, and precisely more than half of our clients in that country have automated plans.[4]
This quick analysis of the retirement situation in the United States, which can be deepened in How America Saves 2021 tells us that Mexico is on the right track and that the improvements made in recent years are strengthening the retirement status of Mexicans. It also puts into perspective how beneficial our current defined contribution system and individual accounts professionally managed by Afores have been and are.
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[1] How America Saves 2021 – The Vanguard Group Inc. Page 72
[2] How America Saves 2021 – The Vanguard Group Inc. Page 80
[3] How America Saves 2021 – The Vanguard Group Inc. Page 77
[4] How America Saves 2021 – The Vanguard Group Inc. Page 4
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Juan Hernández, General Director of Vanguard for Latin America *
The opinions expressed are solely the responsibility of their authors and are completely independent of the position and editorial line of Forbes Mexico.