Speaking at the U.S. Senate Committee on Finance hearing, “Helping Americans Prepare for Retirement: Increasing Access, Participation and Coverage in Retirement Savings Plans,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, noted that more than half of working-age households are at risk of inadequate retirement income, and with declining replacement rates from Social Security, employer-sponsored retirement plans become much more important.
She pointed out that provisions in the 2006 Pension Protection Act (PPA), such as automatic enrollment and automatic contribution escalation, have helped boost employer-sponsored plan participation and savings levels. “However, the effects of the PPA appear to have played themselves out,” she said, “and today fewer than half of participants have access to auto-enrollment, and a much smaller fraction have auto-escalation.”
Munnell said proposals to broaden access to potentially low-cost multiple employer plans (MEPs) may be a useful vehicle for expanding coverage, as are proposals to offer increased financial incentives to start new plans, additional incentives for auto-enrollment, and credits for employer contributions. Other proposals to encourage higher matches, less leakage, and the portability of lifetime income would have a positive impact.
“I fear that their impact will be modest,” Munnell told the committee. “Making MEPs more accessible does not mean that employers will take advantage of the options. Policymakers have tried to close the coverage gap in the past by introducing streamlined products that can be adopted by small businesses. For example, the SIMPLE plan, which is administered by the employer’s financial institution, does not require the employer even to file an annual financial report. These simplification initiatives, however, have clearly not reversed the trend toward declining coverage.”
However, Munnell said the proposal to expand the Saver’s Credit and make it refundable has the potential for a real impact. To achieve this impact, however, low-wage workers have to make contributions to a retirement account, and at this point, relatively few do, because many lack coverage. Expanding coverage, coupled with auto-enrollment, is the only realistic way to achieve this goal, she contended. “Many states are in the process of setting up their own auto-IRA programs, and the expanded Saver’s Credit could be seen as a matching contribution from the government that could encourage workers not to opt out once they are auto-enrolled,” she noted.NEXT: Bolder steps needed
However, given the enormity of the retirement savings crisis, Munnell said bolder steps are needed. The two most important changes would be to make the 401(k) system work better and enact auto-IRA legislation at the national level so that each state does not have to set up its own plan.
“The most important policy change would be requiring all 401(k)s to be fully automatic, while continuing to allow workers to opt out if they choose,” she said. “Plans should automatically enroll all of their workers—not just new hires—and the default employee contribution rate should be set at a meaningful level and then increased until the combined employee contribution and employer match reach 12% of wages. The default investment option should be a target-date fund comprised of a portfolio of low-cost index funds.”
Munnell also suggested addressing the problem of 401(k) leakages by tightening the criteria for hardship withdrawals to limit them to unpredictable emergencies; raising the age for penalty-free withdrawals from 59 1/2 to at least 62; and prohibiting cash-outs when switching jobs. Participants would retain access to their funds in emergencies through loans.
Financial incentives alone will not solve the coverage gap, according to Munnell. “We need to automatically enroll uncovered workers into a retirement savings program. Once employers are required to provide coverage either under a plan that they choose themselves or under a new auto-IRA program, they may become more interested in adopting an MEP, with its low cost and easier accessibility.”
The American Benefits Council submitted an official statement for the hearing record, describing the successes of the employer-sponsored system and the numerous opportunities to expand access and improve outcomes for employees.
The Council cited numerous recommendations from its latest public policy strategic plan, “A 2020 Vision,” including increasing catch-up contribution limits and lowering eligibility to age 45; reducing or combining the number of retirement plan information disclosure requirements; and establishing an alternative automatic escalation safe harbor for retirement plans, among other things.
The Council also identified three additional recommendations:
- Ensure that the state and local retirement plan proposals do not undermine employer-based plans;
- Establish fiduciary safe harbors and outsourcing rules for plan sponsors; and
- Prevent acceleration in the decline in the defined benefit system.
John J. Kalamarides, head of Institutional Investment Solutions at Prudential Retirement, recommended that the Department of the Treasury and the Internal Revenue Service, in coordination with the Department of Labor, develop a safe-harbor model plan that minimizes the administrative complexities and costs of MEPs, is not subject to complex tax-qualification testing requirements, and enhances the ability of MEPs to generate positive retirement outcomes for plan participants. He shared a template Prudential would recommend for such a model.
However, he focused on the fact that very few individuals are being offered the opportunity to consider a guaranteed lifetime income option as part of their retirement plans, which is important because few workers are able to manage investment and longevity risks in retirement on their own.
He expressed support for proposals that would address concerns around the portability of certain in-plan annuity features. “Portability issues are raised when a plan sponsor decides to modify or eliminate an investment option with a guaranteed lifetime income feature with respect to which some participants may have invested. Under the proposal, invested participants would, upon the elimination of the investment or feature, be permitted to transfer their interest to another employer sponsored retirement plan or IRA, without regard to whether a distribution would otherwise be permitted,” he said. “The elimination of issues around portability would be very helpful in addressing the concerns on the part of some plan sponsors regarding the inclusion of in-plan annuity products and the discharge of their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA).”
Kalamarides said the challenge of encouraging employers to offer guaranteed lifetime income products to their employees as part of their retirement plan is exacerbated by the current Department of Labor rules governing the selection of annuity providers—rules that require any employer considering the inclusion of an annuity product to assess, and assume fiduciary liability for, the ability of the annuity provider to satisfy its contractual obligations. Prudential believes the burden of such assessments is more appropriately the role of state insurance regulators, not plan fiduciaries.
“We believe the current safe harbor standard is having a chilling effect on plan sponsor considerations of guaranteed lifetime income products,” he stated. “In this regard, we support approaches identified by the Working Group pursuant to which plan fiduciaries would, on questions of financial viability, look to insurers to confirm they are in good standing with state licensing, financial solvency, auditing and reporting requirements; requirements established by the states to protect their citizens, including plan participants.”
Insured Retirement Institute (IRI) President and CEO Cathy Weatherford also said that providing clear rules to plan sponsors to encourage the inclusion of lifetime income products in workplace plans and requiring lifetime income estimates on retirement plan statements are important initiatives.
Links to witness testimony can be found on the committee’s website.