Speaking at the U.S. Chamber of Commerce Capital Markets Summit on April 10, Ronald P. O’Hanley, president, Asset Management and Corporate Services at Fidelity Investments, said the Pension Protection Act of 2006 (PPA) was a major stride toward improving individual retirement savings outcomes by expanding fiduciary safe harbors and enabling employers to more proactively drive workers to take advantage of and realize more benefits from their workplace plans.
O’Hanley told Summit attendees that enabling automatic enrollment, automatic savings increase programs, and auto default to lifecycle investment strategies have had a major impact on getting more participants to enroll in plans and have been a key driver of improved outcomes for workers. However, he added that Congress needs to do more to fully realize PPA’s potential.
“Policymakers should take steps now to increase the default savings rate to at least 6%,” O’Hanley urged, noted that Fidelity research has shown employees who are auto-enrolled in their workplace plans, regardless at what level and regardless of income level, have nearly identical opt-out rates. He also contended that policymakers should require auto-increase programs as part of plan design, unless employees choose to opt out of participating. “Automatic annual increase programs are the single most effective driver of employee contribution increases, accounting for close to a third of all contribution increases last year and nearly two-thirds of increases by workers in their early 20s,” O’Hanley noted.He recommended policymakers further incent employers to adopt auto-increase programs by easing fiduciary and testing burdens and essentially expanding the PPA safe harbors in addition to mandating auto features—along with a participant opt-out—in all new plans, noting that the features cost the employer nothing incrementally and are proven drivers of retirement savings.
Addressing the challenge of low financial literacy among workers, O’Hanley told Summit attendees: “We should all be doing everything we can to expand, promote and perhaps require financial education in the workplace."
While he conceded that investors need proper protections in place, he added that their best interests can only be served if the regulatory framework allows for a wide range of tools to serve the needs of investors and provide the low-cost guidance, education and advice they want and need. O’Hanley said that the Department of Labor's (DOL) original Employee Retirement Income Security Act (ERISA) fiduciary investment advice proposal would have significantly expanded the definition of fiduciary investment advice, and “the effect of such a rule would shift the legal line between investment advice and education, and thus dramatically curtail the valuable education and guidance investors receive today.”
He urged that Congress and others should keep the pressure on the DOL and reject any proposal that would limit the availability of education and guidance to American workers when the agency reproposes its rule.
In his testimony, O’Hanley said lack of savings, lack of access to employer-sponsored retirement plans, longer life spans, low financial literacy and potential changes to the tax treatment of retirement savings (see “Americans Support DC Plan System”) are all threatening the future financial security of American workers. He called for simplifying and streamlining the savings vehicles that exist today to make them easier to use and more cost-effective for employers to offer, as well as providing new incentives and expanded choice of savings vehicles for people who do not have access to an employer-sponsored retirement plan.
O’Hanley suggested lawmakers enable IRAs to be opened as early as birth, without the requirement of earned income, and said whether so-called auto-IRAs or some other retirement vehicle, lawmakers should devise administratively simple approaches that open retirement savings choices to individuals not covered by traditional defined contribution plans, while not imposing burdensome mandates on small businesses.More from the Capital Markets Summit can be found here.