the 2017 PLANADVISER National Conference panel “How Data Interpretation Affects
Retirement Projections,” Wednesday, executives from two leading retirement
trade associations that conduct research on the state of the industry discussed
how current plan design tools could be optimized to avert a national retirement
crisis. Each man also shared initiatives his organization is taking to make the
system even stronger.
“There was a recent hit piece in the Washington Post describing the ‘retirement crisis,’ which was countered by an op-ed in the National Review saying it is more manageable [than what some pundits are saying],” noted Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA).
The Employee Benefit Research Institute (EBRI) recently studied the accumulation phase of people up to the age of 64, taking into account not only their defined contribution plans but also their defined benefit (DB) plans, individual retirement accounts (IRAs), Social Security, and housing equity, noted moderator Alison Cooke Mintzer, editor-in-chief of PLANADVISER.
EBRI’s 2014 data showed that 56.7% of Early Baby Boomers and 58.5% of Late Boomers will not run out of money in retirement, Minsky agreed. Nearly 90% (86.4%) of participants in the highest-income quartile, 71.7% of those in the third quartile, 52.6% in the second quartile and 16.8% in the lowest-income quartile will not run out of money, he continued.
Making plans available to employees is also critical, Minsky said. Participants who have been eligible to participate in their DC plan for 20 years or more, and have done so, are on a pretty solid trajectory to not run out of money in retirement, he said, observing that EBRI projects that 94.7% of these folks in the highest income quartile, 87.7% of those in the third quartile, 71.3% in the second quartile, and 35.9% in the lowest-income quartile will have adequate financial resources in retirement.
But plan design is critical to get participants to the finish line, Minsky said. DCIIA projects that participants in plans with voluntary enrollment throughout their working career and who retire at age 65 will have a portfolio 5.02 times their final salary, he noted. However, those in plans with automatic enrollment, “even if implemented imperfectly” at a 3% deferral rate without automatic escalation, will have 6.66 times their final salary, he continued. “Just that one modest change has a huge impact,” he said.
If auto-enrollment is paired with auto-escalation up to a 10% threshold, participants can retire with 7.85 times their final paycheck, Minsky said, and if that combines with no leakage, they can retire with 8.54 times their final salary.
“Leakage is a pretty wide-open back door. Design matters,” he stressed. “The current DC system can do much better with thoughtful plan design, including automatically enrolling participants back into the plan at the end of their hardship withdrawal payments. This is all infinitely doable. You hear about how the system isn’t working—but look at how you can get a worker to nearly nine times final salary in just [his] DC plan alone.”
NEXT: Beyond design
Mintzer interjected, “With news of retirement plan litigation occurring on a weekly basis, plan sponsors are terrified of being sued. The reason why this matters so much is because, if people retire securely, they won’t sue their employer. Advisers need to tell plan sponsor clients this is why these tools need to be optimized and to convince plan sponsor committees to be proactive.”
Beyond these plan design tools, The SPARK Institute is
working in six major areas to improve Americans’ retirement readiness, said Tim
Rouse, the institute’s executive director. SPARK is advocating more effective
use of automatic plan features—including auto-portability—the expansion of the saver’s
credit and the small-employer tax credit, an increase in contribution limits,
open multiple employer plans (MEPs) and retirement income solutions within DC
plans, Rouse said.
He pointed to another recent EBRI study, which found that, if the industry had auto-portability from one DC plan to another, so that a participant’s balance was automatically rolled into his new employer’s plan, “there would be an additional $2 trillion in retirement savings,” Rouse said.
He suggested that the industry campaign the Internal Revenue Service (IRS) to include the saver’s credit on participants’ W-2 tax forms.
“This is an untapped opportunity for advisers,” Minsky concurred.
And open MEPs “could solve the problem for a lot of small employers concerned about the fiduciary responsibilities and administrative costs” associated with offering a DC plan, Rouse said. “Combined with a $7,500 employer tax credit, these two initiatives help move the needle for a big chunk of plan sponsors.”
Minsky added, “There is no one silver bullet [to help improve Americans’ retirement readiness]. Are we willing to rethink the paradigm? We need to automate everything—including plan design, at the right levels, with escalation and sensible investment defaults. If we did that, we would be in pretty good shape. We know the answers here.”
Minsky and Rouse concluded the panel by observing that, if recordkeepers were able to consolidate participants’ financial information, the nation’s retirement outlook could appear significantly more optimistic.
Rouse said, while cybersecurity issues deter many recordkeepers from sharing information, some providers are seeking out better efficiencies, which could ultimately result in data aggregation.