PA: What is the most powerful factor in making retirement a reality for most Americans?
Ritter: The biggest driver of outcomes in retirement is individual savings behavior. We want people to have options in determining the lifestyle they want in retirement. And the most important element is how much they’re saving right now. There’s been a lot of talk over the past couple of years about the 2008 downturn, investments and future interest rates. At the same time, if someone is not saving adequately, there’s really little else that they would be able to do to make up for that.
PA: With that in mind, how are plan designs evolving to create better outcomes for participants?
Ritter: It’s still about the use of automated services. While that message is not new, it’s amazing that we have not seen maximized use of automated services so the improvement can be realized for all participants. For years, the approach in this industry was to try to motivate people on their own to do the things they need to do, and frankly, we haven’t been very successful in that. We have finally realized that if people are not going to take action, you need to think about the system you create and what the default is.
If I can give an analogy, years ago when you made yourself a cup of coffee, if you walked away from the coffee maker, it would stay on and burn your house down. Some people decided that setting up a system with that kind of outcome if people did nothing was probably not the best, so now when you make coffee and walk away, the coffee maker turns itself off. That sounds like an obvious thing to have the coffee maker do, but it was many years before that feature was introduced.
In the retirement industry, we are finally coming to the conclusion that if people are going to do nothing, we need to change the system so that the outcome of that default is positive. In the old system, it meant many people saved nothing for retirement. Now, automatic enrollment and automatic increase can significantly move the savings needle with much better results.
That’s how plan designs are evolving. We’ve also seen an evolution in terms of who is being helped by automated services. Plan designs are focusing on more than just new employees, picking up tenured employees through re-enrollment events or on an ongoing annual basis. Plan designers who help drive this inevitable change will be looked to as industry leaders who can solve the problem and get better outcomes.