Plan Design Is Key to Fixing Retirement Crisis

Witnesses during a U.S. Senate committee hearing argued that defined contribution (DC) plan design is key to solving the retirement crisis in America.

Opening “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis” hearing of the United States Senate Committee on Finance Subcommittee on Social Security, Pensions, and Family Policy, Chairman Senator Sherrod Brown (D-Ohio) said shoring up the Social Security system is an important part of ensuring retirement security for Americans.

But, Ranking Member Senator Patrick J. Toomey (R-Pennsylvania) added that we should shore up all three of the legs of the three-legged stool for retirement—Social Security, employer-sponsored savings plans and individual savings. He said lawmakers shouldn’t mess with the tax advantages employer-sponsored retirement plans offer because an important part of future economic stability is long-term return on assets, and one must first accumulate those assets.

Andrew G. Biggs, resident scholar at the American Enterprise Institute in Washington, D.C., said addressing the retirement security crisis can be done with plan design. Many long for the security of traditional defined benefit (DB) plans, but Biggs contended many of the benefits of DBs can be transferred to DCs—through auto-enrollment, auto-deferral escalation, the use of indexed funds to lower fees, asset allocation funds to help participants diversify investments, and at least partial annuitization of account balances. “Such a plan would address most of the concerns raised over retirement security today, with very limited downsides for individuals and no risk to the taxpayer,” he said.

Robert G. Romasco, president of the American Association for Retired Persons (AARP) in Washington, D.C., said AARP is also in support of automatic plan features and of legislation to implement automatic individual retirement accounts (IRAs) for American workers who are not covered by an employer-sponsored retirement plan.

John F. Sweeney, executive vice president at Fidelity Investments in Boston, Massachusetts, told hearing attendees the four key stakeholders—the government, employers, individual investors and retirement plan providers—must work together in order to have a sustainable and stable retirement system. “In addition to meeting individual financial goals, the success of the American retirement system is a critical component of a healthy economy,” he noted.

Sweeney offered three suggestions:

  • Raise savings now. Increase the adoption of plan design features such as automatic increase programs, which allow workers to automatically increase savings levels annually unless they opt out. Changing the way employers structure how they match retirement savings can encourage even greater levels of personal saving. Innovate the design of retirement plans to focus on “better outcomes” for participants. This will aim to have plans target a worker’s optimal savings outcome. In other words, design the plan around the paycheck it can provide in retirement, rather than how much one can save while working.
  • Double the default deferral rate. For policymakers, Fidelity feels the time is now to build on the strength of the Pension Protection Act and enhance its best features. It has been seven years since its passage and while automatic enrollment works, a default rate of 3% is too low. Fidelity believes in a target goal of saving 10% to 15% of salary annually. To get to this level a minimum of a 6% safe harbor auto-enrollment is needed along with annual auto increase of 1%. Policymakers can help by increasing the default deferral rate to at least 6% and requiring defaulting into auto-increase programs.
  • More, not less education and guidance is needed for working Americans. Potential rulemaking by the Labor Department in this area could significantly curb the ability of millions of low- and middle-income workers to gain fundamental financial education and guidance they need to improve their financial security. Policymakers need to ensure steps are taken to bolster, not hinder the ability of working Americans to receive education and guidance about their financial future.

Sweeney encouraged the committee to work with the Administration to ensure people can continue to have wide access to the kind of resources they need to make good responsible decisions for themselves and their families.

In a written statement to the committee, Hank Kim, Esq., executive director and counsel for the National Conference on Public Employee Retirement Systems (NCPERS), points to the success of DB plans for public workers and suggests the retirement crisis solution for the private sector is the Secure Choice Pension (SCP). The SCP is envisioned as a public-private partnership to provide retirement security for American workers, particularly those who work for small businesses and who don’t currently have a defined benefit pension.

The concept is that the states—individually, or possibly in groups—would enact legislation to establish a state or regional SCP plan. SCPs would be multiple-employer hybrid defined benefit pension plans. Each SCP would have a board of trustees composed of state, private employer and private employee/retiree representatives. The board would hire a chief executive officer and administrative staff to administer the SCP. The board and staff would have fiduciary duty to the SCP plan and its participants. Participation in the SCP would be voluntary. Contributions to the SCP would come ideally from both employers and employees.

More about the hearing and in-person testimony is here.