speakers' remarks: the failure of the 401(k) report

8/8/2019 Speakers' Remarks: The Failure of the 401(k) Report

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TheFailureofthe401(k):

ReinventingRetirementSavingsPlansForaMoreSecureFuture

November10th,2010,Washington,DC

SPEAKERSREMARKS

ROBERTHILTONSMITH

POLICYANALYSTATDEMOS

AsTeresajustkindlynoted,IamRobbieHiltonsmithandImapolicyanalystwiththeEconomic

OpportunityProgramatDemos.

Justabitofbackgroundonus:Demosisanationalpolicyandadvocacyorganizationworkingin

pursuitof4overarchinggoals:

o Amoreequitableeconomy;o Avibrantandinclusivedemocracy;o Anempoweredpublicsectorand,o ResponsibleU.S.engagementintheworld

Iamheretospeaktodayaboutthestateofoneofthepillarsofournationsretirementsystem-

individualretirementplans.

OurcountrywasbuiltonthehardworkofAmericans.BeginningwiththecreationofSocial

Securityin1935,wehave,asanation,honoredthatworkwithacommitmentadignified,secure

retirement.Moreover,oldagesecurityisavalueweallshare:webelievethatsucharetirement

shouldbetherightofallworkingAmericans

Asyouwillheartoday,andasthepaperDemosisreleasingtodayshows,wenotalwayslivedup

tothiscommitment.Ifwestaythecourse,wellretirewithlessthanourparentsandour

childrenwillretirewithrelativelylessthanwedid,reversingmanyofthegainsofthepastfifty

years.


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Thisdecline,however,isnotirreversible.AsKarenandMoniquewillhighlight,withcommon

sensepolicieswecantrulyfulfillourcommitmenttoasecureanddignifiedretirementforall

Americanworkers.

Inshort,theAmericanretirementsystemisintrouble.Currently,halfofretireesrelyonSocial

Securityforover80%oftheirretirementincome.WiththemedianSocialSecuritybenefitat

$14,000ayear,manyretireesareforcedtoliveonincomesthatarewellbelowthefederal

povertyline.

Forthe52%oftheworkforcethathassupplementalretirementincome,thatsupplementis

increasinglyanindividualretirementplana401kor403b.Theseplans--personalaccounts

intowhichworkersmaketax-advantagedcontributionsthataresometimes,butnotalways,matchedbytheiremployer--havereplacedthetraditionalpensionastheprimarysupplement

toSocialSecurity.

Thetraditionalpension,whichmanyinpreviousgenerationsreliedon,guaranteedfixed,lifetime

paymentsduringretirement.Individualretirementplansdiffergreatlysavingsaresubjectto

thefluctuationsofthefinancialmarketsandnofixed,lifetimepaymentsareguaranteed.

Itsimportanttonotethatindividualretirementplanswereneverintendedtobecomethemain

supplementtoSocialSecurity.CreatedbytheRevenueActof1978primarilyasavehiclefor

taxingexecutivebonuses,theseplansbecametheprimaryvehicleforprivateretirementsavings

throughregulatoryfavoritismandadoptionbycompanieslookingforalessexpensivemeansof

providingretirementbenefits.

Imentionthistohighlightthatourcurrentretirementsystemwasntcreatedbythekindof

comprehensive,thoughtfulandinclusivenationalconversationthatoneofthemostimportant

socialissuesfacingourcountrydeserves.IthinkmostAmericanswouldagreethatbackdoor

legislatingthroughthetaxcodeisnowaytotreatanissueofsuchimportance.

Individualretirementplansdocontainsomefeaturesthatarethataremoresuitedtotodays

mobileworkforcethanthetraditionalpensionprimarilyportabilityandpersonalownership


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ofassets.However,individualplansdrawbacksfaroutweightheiradvantages.

Tostart,toofewworkershaveaccesstoworkplaceretirementplansandthataccessisnot

sharedbroadly;just53%ofprivateindustryworkershaveaccesstoemployer-provided

retirementbenefitsofanysort.

Therearegreatdisparitiesintheavailabilityofindividualretirementbenefitsbynearlyevery

conceivablecategory:industry,race,income,employersize,andjobstatus.

Forexample,only45%ofworkersintheserviceindustry,oneofthenationsfastestgrowing

sectors,haveaccesstoretirementbenefitsatwork,while80%ofmanagementandprofessional

workersdo.

Evenforthosefortunateenoughtohaveaccess,individualretirementaccountsareclearly

fallingshortofprovidingadequateretirementbenefits.ForthehalfofAmericanfamiliesthat

haveretirementsavings,themedianbalanceforthoseapproachingretirement(55-64)isjust

$98,000,lessthanhalfofwhattheyneedforretirement.Sowhyaretheyfallingshort?Manyof

thelargetrendsintheeconomyfallingwages,depletedhomeequityhavemadeitmore

difficultforfamiliestosave.Buttheaccountstheyaresavinginhaveamajorroleaswell.

Betweentheoutrageouslyhighfeesandthemultitudeofriskstowhichaccount-holdersare

exposed,individualretirementplansaresimplyunsuitabletobeournationsprimarysourcefor

personalretirementsavings.

First,wellenumeratetherisks.Account-holdersruntheriskofoutlivingtheirretirement

savings,retiringinthemidstofamarketdownturn,havingtowithdrawtheirretirementsavings

topayforalargelifeexpense,suchasabigmedicalbill,orsimplynotknowinghowmuchto

contribute,orwheretoinvestit.

Inthistalk,Imgoingtohighlightmarketrisk,theriskoflosingalargepartofonessavingsto

thevolatilityofthemarket,becausethisreallyistheriskthatrendersindividualaccounts

irreparablyunsuitableasprimaryretirementsavingsvehicles.


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Becausewecouldimplementvariousreformstothe401ksystemtoalleviateorpartially

mitigatetheotherrisks;forexample,wecouldmakeiteasierforpeopletoannuitizetoalleviate

longevityrisk.

However,theoneriskthatwecantfixthroughreformstothe401ksystemismarketrisk;itsa

fundamentalfeatureoftheseplans.AndmarketriskisparticularlytroublesomeforAmerican

workers.

Thefinancialcrisisandfollowingrecessionofthepastfewyearshasmadethemagnitudeof

marketriskonretirementsavingsabsolutelyclear.Duringthestockmarketplungeof2008and

2009,individualretirementplanslostatotalof$2trilliondollarsinvalue,whiletheaverage

401kparticipantlostover1/3ofhersavings.

Theeffectofmarketvolatilityonthesesavingsactuallyhasalargeimpactoneconomyasa

whole.Individualswhowishtoretireduringamarketdownturnmusteitherdosowith

significantlyreducedretirementincomeorpostponeretirement(iftheyreluckyenoughtobe

ableto),whichinturnlimitsemploymentopportunitiesfortherestoftheworkforce.

WecreatedafictionalworkerinordertoillustratehowmarketriskimpactsAmericanfamilies.

ThisworkerwevenamedherJane--makesthemediannationalsalaryandcontributed

between5and8%ofhersalarytoher401koverthe40yearsofherworkinglife.Itsimportant

tonotethatJaneis,inseveralsenses,anidealizedworker:shemadenowithdrawalsfromher

retirementaccountsandmadecontributionsthemonaconsistentbasis.

So,byourcalculations,ifJaneretiredattheheightofthelastbigstockmarketbubblein2000,

shewouldhavehadover50%moretoliveonduringretirementthanifshehadretiredinthe

depthsofthecurrentrecessionlastyear.Toputthisinmonetaryterms,shewouldhaveretired

withover$100,000lessin2009thanifshedretired9yearsearlier.Itssimplyunfairtomake

retirementsecurityinessenceagenerationalgamble.

Notonlyareindividualretirementplansanextremelyriskyretirementbetforworkers,theyare

alsoanincrediblycostlyoneaswell.Thehighfeesassociatedwiththeseplansrenderthemeven


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moreinadequateastheplaceforprimaryretirementsavings.

Thoughmanyaccount-holdersarentevenawareoftheexistenceofthesefees,individual

retirementplanparticipantsinfactpaymanydifferentonestovariouslayersoftheprivate

retirementsystem.

Thelargestandmostharmfuloftheseistheinvestmentmanagementfee.Thisisthecutthatthe

mutualfunds--inwhichthemajorityofindividualretirementassetsareinvested--takeoutof

youryearlyreturns.Theytakethiscutregardlessofwhethertheaccounthasagoodyearorbad,

earns10%interestorfallsby20%.

Thecostofjustthisonefeeisstaggering.UsingourgoodfriendJaneonceagain,wevecalculatedthatoverherlifetime,theinvestmentmanagementfeealonewouldcostherasmuchas

$70,000,orinotherterms,20%ofherwould-beaccountbalance.

Toputthisinperspective,the$70,000thatJanelosttothisfeeisnearly4yearsofmortgage

paymentsforherfamily.

Anditisntasifthereturnsearnedbythemutualfundsjustifytheseexorbitantcharges:

institutionalinvestors,whoinvesttheassetsofpensionfunds,earncomparablereturnsbut

dosoatafractionofthecost.Ifwewanttoensureanadequateretirementfortheaverage

worker,weneedasystemthatdoesntcostthemanarmandaleg.

Americanswhoworkhardtheirwholelivesshouldbeabletocountonaguaranteedstreamof

incomethroughouttheirhard-earnedretirement.Betweenthehighfeesandnumerousrisks,an

individualretirementaccountsimplyisntthevehicletoprovidesecureretirementsavings.

Therearewayswecanprovideasecureretirementforallworkers.KarenFriedmanwilltellyou

moreaboutvariouswayswecouldensurethis,andMoniqueMorrisseywillhighlightone

particularplan,Teresasinfact,thatwouldbeafair,budget-neutralwaytoensurethisstable

retirement.


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KARENFRIEDMAN

EXECUTIVEVICEPRESIDENT&POLICYDIRECTOROFTHEPENSIONRIGHTSCENTER

Goodafternoon.ImdelightedtobeheretodaytospeakaboutacampaigncalledRetirementUSA.

Robertjustgaveaterrificoverviewoftheproblemsoftheprivateretirementsystem.

RetirementUSAisaboutdevelopingcreativeandcomprehensivesolutionsfortheretirement

incomecrisis.Thiscampaignisworkingtowardanewuniversal,secure,andadequate

retirementincomesystemthat--inconjunctionwithSocialSecurity--willprovidefuture

generationsofworkerswithsufficientincomeforretirement.

ThePensionRightsCenterisoneoffiveconvenersofRetirementUSA,alongwiththeAFL-CIO,

theEconomicPolicyInstitute,theNationalCommitteetoPreserveSocialSecurityandMedicare,

andtheServiceEmployeesInternationalUnion,aswellas23othersupportingorganizations,

includingDmosandourtrustyadvisersatSCEPA.

Overthepastfewmonths,weveheardalotoftalkfrompoliticiansaboutthefederaldeficit.But

todayIamdiscussinganotherkindofdeficitthatpolicymakersmustaddress--andaddress

soon.Thatis,themassiveandgrowingretirementincomedeficitfacingmillionsofAmericans.

Theretirementincomedeficitisthegapbetweenthepensionandretirementandsavingsthat

Americanhouseholdshavetodayandwhattheyshouldhavesavedforretirementbytodayto

maintaintheirstandardoflivinginretirement.

ThisdeficitistheresultoffactorsdiscussedbyRobbie:thedeclineofgoodprivatepensionplans,

thefailingsof401(k)plans,andtheoveralllowcoverageratesinemployer-sponsoredplans.

TheretirementincomedeficitnumberwascalculatedbytheCenterforRetirementResearchat

BostonCollegeonbehalfofRetirementUSA.Andthenumbercomesoutto$6.6trilliondollars.

Thatisabiggap.Soyoucanseewhywerehavingthisbriefingtodayonsolutions,


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BeforeIgetintothemeatofRetirementUSAprinciples,Iwanttomaketwoimportantpoints.All

oftheorganizationsinR-USA,whileworkingforlong-termreforms,areseparatelyalsoworking

todoeverythingpossibleintheshorttermtoimprovethecurrentsystembyworkingto

encourageandpreservedefinedbenefitplans,strengthenprotectionin401(k)plans,and

increasecoverage

IalsowanttoemphasizethatRetirementUSAiscommittedtoworkingforanewprivate

retirementincomesystemthatwouldsupplementthesolidfoundationprovidedbySocial

Security.WeopposeanycutstoSocialSecurity,whichwouldonlyservetoincreasethe

retirementincomedeficitthatmillionsofAmericansarealreadyfacing.

Havingsaidthat,welaunchedRetirementUSAtostartanationalcampaignanddiscussionontheneedtodevelopabetterretirementsystemtosupplementSocialSecurity.

Westudiedsystemsandproposalshereandinothercountriesanddeveloped12principlesthat

combinethebestfeaturesofdefinedbenefitplans,401(k)saswellasadditionalelements.

Wehavethreeoverarchingprinciplesthatwebelieveshouldguidethereshapingofa21st

centuryretirementsystem:

(1)UniversalCoverage.Everyworkershouldbecoveredbyaretirementplan.AnewretirementsystemthatsupplementsSocialSecurityshouldincludeallworkersunless

theyalreadyareinplansthatprovideequallysecureandadequatebenefits.

(2)SecureRetirement.Retirementshouldntbeagamble.WorkersshouldbeabletocountonasteadylifetimestreamofretirementincometosupplementSocialSecurity.

(3)AdequateIncome.Everyoneshouldbeabletohaveanadequateretirementincomeafteralifetimeofwork.Theaverageworkershouldhavesufficientincome,togetherwithSocial

Security,tomaintainareasonablestandardoflivinginretirement.

Hereareadditionalprinciples:

Retirementshouldbethesharedresponsibilityofemployers,employeesandthegovernmentmeaningthat:


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Employersandemployeesshouldberequiredtocontributeandthegovernment

shouldsubsidizethecontributionsoflower-incomeworkers.

Contributionstothesystemshouldbepooledandprofessionallymanagedtominimizecostsandfinancialrisks.

Also,thereshouldbe:

Payoutsshouldonlybemadeatretirementandbenefitsshouldbepaidoutforlife. Benefitsshouldbeportable. Additionalvoluntarycontributionsshouldbepermitted, Lastly,thesystemshouldhaveefficientadministrationandeffectiveoversight.

RetirementUSAisnotsupportinganyoneproposalatthistime.Instead,wearelookingatmanypossibledesigns.

Allofthegroupsinourinitiativeagreethatthemostefficientwayofstrengtheningworkers

retirementsecuritywouldbetoincreaseSocialSecurity.However,ourgroupsrecognizethat

Americasretirementincomeprogramshavehistoricallybeenamixofpublicandprivate

systems.Forthatreason,ourfocusisonprinciplesthatmustunderlieanynewprivatesystem

tosupplementSocialSecurity.

Hereareasamplingofproposalsandprogramsthatmeetmostorallofourprinciples,showing

thatcreatinganewsystemisfeasible.

TIAA-CREF,whichwasstartedforuniversityprofessors,isportable,allowsforemployercontributions,poolsinvestments,andthemoneyisgenerallypaidoutas

annuities.

MoniquewilltalkabouttheGRA,theGuaranteedRetirementAccount. TheERISAIndustryCommitteehasproposedaGuaranteedBenefitPlan.Thisplan

wouldberunbyindependentadministrators,contributionswouldbepooled,the

principalisguaranteed,andbenefitswouldbepaidasannuities.

TheNetherlandshasasystemofdefinedcontributionplans,inwhichemployeesandretireescollectivelysharetheriskofinvestmentloss.


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InAustralia,allemployerscontributeninepercentoftheiremployeespayintoamixof

privatenonprofitandfor-profitfundsthatadministerretirementaccounts.

Thesystemsdescribedabovedifferfromproposalstomodifyexisting401(k)plansorIRAs

because

Theyrequirecontributionstobepooledandpaidoutonlyatretirementintheformoflifetimepayments;

Theyeliminateorminimizetheamountofriskshoulderedbyindividuals;and, Theytrytoachievealevelofadequacy.

WhilethePensionRightsCenteriscommittedtodoingeverythingpossibletoimprovethe

currentsystem,theevidenceisclearthatworkersneedmorethanjustmorepatchesonouralready-patchworksystemofretirementplansandindividualaccounts.Weneedcomprehensive

reform.


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MONIQUEMORRISSEY

ECONOMISTATTHEECONOMICPOLICYINSTITUTE

Goodafternoon.MynameisMoniqueMorrissey,andImaneconomistattheEconomicPolicy

Institute.ImheretotalkaboutoneproposedsolutiontotheproblemsRobbiehasdescribedso

eloquentlytheGuaranteedRetirementAccountplan.

TeresaGhilarducci,ourmoderator,developedtheGRAplanin2007aspartoftheEconomic

PolicyInstitutesAgendaforSharedProsperity.ButIguessTeresawantedtoofferaslightly

differenttakeonthetopic,sotoday,Illbefocusingonthequestionofwhatistheproperroleof

governmentinretirement.

Inanutshell,theGRAplanisahybridplanmodeledonthetraditionalannuitythatTIAA-CREF

hasprovidedforuniversityprofessorssince1918.Italsoresemblescashbalanceplansinthe

U.S.andnotionaldefinedcontributionplansthatexistinafewEuropeancountries.

HereshowtheGRAplanwouldworkinplainEnglish:allworkerswhoarentalreadyinan

equivalentorbetterpensionwouldcontribute2.5%oftheirpayintoaGuaranteedRetirement

Account.Thecostwouldbeoffsetbyaflat$600credit,whichwouldcovertheentirecostfor

workersmaking$24,000orless.Employerswouldchipinanadditional2.5%,foratotal

contributionof5%.

Fundswouldbepooledandinvestedinabalancedportfoliomanagedbyoutsideinvestment

managers.Thefederalgovernmentwouldguaranteeaminimum3%returnaboveinflation.At

retirement,benefitswouldbepaidintheformofalifetimepension.WithSocialSecurity,these

benefitswouldbesufficienttoreplacearound70%ofpre-retirementearningsfortheaverage

long-careerworker,theminimummostexpertsbelieveisrequiredtomaintainthesame

standardoflivinginretirement.

TheGRAplanmeetsalltwelveoftheRetirementUSAprinciplesKarenjustdescribed,including

theoverarchingprinciplesofuniversality,securityandadequacy.Notcontenttoleavewell

enoughalone,however,wereworkingwithTeresaandherNewSchoolteamtoupdateand

expandtheGRAplan.Ourgoalistofleshoutsomedetails,addressissuesthathavebeenraised


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sincethepaperwaspublished,andconsidervariations,includingamoredecentralizedapproach

Illtouchonbrieflytoday.

AsImentioned,ImgoingtofocusonhowtheGRAplanre-imaginestheroleofthefederal

government.SincetheGRAplanwouldrequireallworkerstoparticipateinaGRAorequivalent

pension,thefederalgovernmentwouldhavetosquarelyaddressissuesofaffordabilityandrisk.

Onewaytoimproveaffordabilitywouldsimplybetoreturntoadefinedbenefitpensionsystem

thatcantakeadvantageofscaleeconomiesandriskpooling.Contributionstotraditionalpension

fundsarehalftotwo-thirdswhatareneededtoachievesimilarresultsinanindividualaccount

system.

Butmanyemployerscannotassumelong-termliabilitiesespeciallysmallbusinessesthatemployalotoflower-incomeworkers.Thisisoneofthemainadvantagesof401(k)plansfrom

anemployersperspective,althoughtheysimplyshifttheserisksontoindividualworkers.

Weneedanalternativesystemwherebenefitsarefullyportablethatis,basedonearningsand

contributionstodate,notfinalsalaryandwhereneitherindividualemployersnorworkersare

forcedtotakeonunduerisks.IntheoriginalGRAplan,Teresaproposedthatthefederal

governmentwouldassumetheroleofadministratorandguarantor,butthesamerolecouldbe

playedinamoredecentralizedsystembystateorlocalgovernmentsorbynot-for-profit

multiemployerplans.Suchasystemwouldbemorecomplicatedtosetup,butwouldcertain

advantages,whichIcandiscussinthequestion-and-answerperiod,ifpeopleareinterested.

Asmentioned,theGRAplanwouldguaranteeparticipantsaminimum3%returnaboveinflation.

Thishasbeencriticizedasbothtoolow(thatis,notameaningfulguarantee,sincelong-term

returnsaremuchhigher)andtoohigh(thefederalgovernmentwouldincurtoomuchrisk).

Briefly,ourresponsetothefirstcritiqueisthatexcessreturnswouldeventuallybedistributedto

participants,sothe3%isafloor,notaceiling.However,thegovernmentwouldacttosmooth

returnsbetweenworkersretiringduringbullandbearmarketsaveryimportantfeatureofthe

GRAplanthatisoftenoverlooked.Andthefirstcritiqueessentiallyanswersthesecond,sincethe

federalgovernmenthasamuchlongerinvestmenthorizonthatanyothermarketactor.


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Returningtotheissueofaffordability,ourcurrentretirementsystemreliesheavilyontax

incentivestoencouragevoluntarysavings.Suchasystemnotonlyfavorshouseholdsinupper

taxbrackets,butitdoesntactuallyencouragenewsavingasmuchasitencourageshouseholds

toshiftfundstotax-favoredaccounts,whichisbothineffectiveandexpensive.Inotherwords,

mostofthetaxbreaksgotohouseholdsthatalreadysavetypicallyhigherincome

householdswhocansimplysteersavingstotheseaccounts.Householdscaneventake

advantageoftaxbreaksforretirementsavingswhentheyredissaving,forexample,takingout

homeequityloanswhilecontributingto401(k)s.

TheGRAplanaddressesthisproblemheadon,byshiftingfromamodeloftax-incentivized

savingtoonewheregovernmentsubsidiesareintendedtooffsetthecostofcontributionsin

ordertomakethesystemaffordableforeveryone.ThoughtheoriginalGRAplanwasveryfiscallyconservativeanddidawaywithtaxbreaksfornewcontributionsto401(k)andIRAplans,its

alsopossibletopreservethesetaxbreaksforcontributionsupto$5,000,thecurrentIRAlimit.In

anyevent,existingfundsin401(k)plansandIRAswouldcontinuetoreceivefavorabletax

treatment,andtheseplanscouldcontinuetoserveassupplementarysavingsplans,asoriginally

intended.

TheGRAplanmightseemlikearadicalchangeofdirectiongivenourhistoricrelianceontax

incentivestoencourageemployerpensions,and,morerecently,individualsavings.Butinour

view,whatwasradicalwashowone-sidedtheretirementdiscussionhadbecomecomparedto

thediscussionaroundhealthcarereform,whichrangedfromsinglepayeronthelefttoapublic

optioninthemiddletohealthsavingsaccountsontheright.Incontrast,intheretirementarena,

policymakersinbothmajorpartieshavebeenfocusedonvariationsofasingletheme:expanding

thesystemofretirementsavingsaccounts.

Thisreflectsavogueforso-calledmarket-basedsolutionsthatrelyonincentivesratherthan

mandatesorregulations.Imaneconomist,soIunderstandtheappealofusingacap-and-trade

systemtoreducegreenhousegasemissions,forexample.Butsavingsincentivesareexpensive

andineffectual,soitsnotcleartomethatsuchasystemislessheavy-handedthanauniversal

systemsinceweretaxingPetertoincentivizePaul,andtaxesarentvoluntary.


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Inourview,theGRAplanisactuallymiddle-of-the-roadplan,politically,since,asTeresalikesto

pointout,youcanthinkofGRAsasthepublicoption.InatleastonesensetheGRAplanistothe

rightofthehealthcarelegislationrecentlypassedbyCongressbecausetheflattaxcredit

designedtooffsetthecostisdistributedtoeveryone,ratherthanbeingtargetedatlower-income

households.Butgenerally,initsfocusoncoveringeveryoneadequately,poolingrisks,and

affordability,theGRAplanhasmoreincommonwiththehealthcarereformthanwithmany

retirementproposalsbeingcurrentlydiscussed.

Abigdifferencebetweenthehealthcareandretirementarenas,ofcourse,isthattherealreadyis

auniversalretirementsystemSocialSecurity.Butwithgovernmentfootingabouthalfof

healthcarecostsevenintheoldsystem,andwithSocialSecuritycurrentlyreplacingabouthalfof

whatpeopleneedtomaintaintheirstandardoflivinginretirement,theremaynotbeasbigofadifferenceasyoumightthink.AndthoughweunderstandthatCongressisgoingthroughreform

fatigue,webelievethatourretirementsystemisjustasoverdueforamajoroverhaul.

speakers' remarks: the failure of the 401(k) report

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