With shriveled 401(k) balances, shrunken housing wealth, and a precarious job market, millions of Americans truly continue to struggle in the aftermath of the economic downturn. For many, retirement dreams have all but evaporated.
A new survey by Towers Watson finds that 40 percent of workers plan to retire later than they did just two years ago, and 57 percent now believe that they will need to save more in the future to achieve a comfortable retirement, compared with what they thought two years ago.
It's no wonder that Americans are so uneasy about their retirement plans and prospects; the three-legged retirement stool of a traditional pension, Social Security, and supplemental savings, has been eroding for some time. Fewer and fewer private sector employees have access to traditional pension plans. Scheduled increases in Social Security's retirement age mean lower benefits. And Americans struggle to save enough in their individual 401(k) accounts: The median balance was only $43,700 at year-end 2008, according to a survey by the Employee Benefit Research Institute (EBRI).
This means that even before the recent financial storm — and certainly since — many Americans have not been saving enough to adequately fund their retirement. Moreover, 31 percent of Americans do not even have access to a workplace retirement plan, and only 55 percent of Americans actively participate in their employer-sponsored retirement plan, says EBRI.
Taken together, it seems that the retirement prospects for many Americans may be grim. The Government Accountability Office recently projected that 37 percent of workers born in 1990 may enter retirement age with no retirement savings at all, while 63 percent of Americans in the lowest income quartile are projected to have zero retirement savings.
What To Do?
It's become clear that many Americans are in trouble and something must be done to help them save for retirement. Industry leaders and policymakers should identify ways for employers to achieve their human resource objectives — recruiting and retaining skilled employees — while also providing a modest and stable retirement income for workers in a fiscally responsible manner.
With this in mind, the National Institute on Retirement Security (NIRS) convened a high-level policy conference, “Raising the Bar: Policy Solutions for Improving Retirement Security,” earlier this year in Washington, DC. The goal of the conference was to identify practical, broad-based policy solutions that could be implemented to rebuild a strong retirement infrastructure.
The conference convened thought leaders from across the retirement industry and policy spectrum — retirement plan service providers, regulators and policy makers, plan sponsors and administrators, representatives of employees and retirees, and other experts — to provide insight and knowledge on the full range of the potential policy options available to improve Americans' retirement security.
Across the board, there was broad agreement that we've reached a breaking point — inaction is no longer an option. Many structural improvements were identified to all three legs of the retirement stool. In terms of individual savings plans, solutions included improving defined contribution (DC) retirement savings plans and building new opportunities for individual retirement savings.
Improving Defined Contribution Plan Design
Much of the conference discussions focused on changes that strengthen individual retirement savings in the United States. Many retirement experts see opportunities for better access to lifetime income streams, automatic enrollment, automatic escalation, fee disclosure, addressing the leakage of retirement savings, and financial education and advice. Each of these proposals seeks to make individual savings plans more like the traditional pensions that served millions of Americans so well.
Many experts noted the importance of having a lifetime income stream, or a regular, monthly paycheck for life. Yet there seem to be stubborn obstacles to more widespread use of lifetime annuities in retirement. One challenge seems to be a basic lack of understanding of annuities among Americans, or there may be other problems in the market for annuities. Some believe that partial, gradual, or “trial annuitization” options would encourage greater comfort with annuities.
Automatic enrollment and escalation are features that can be incorporated into DC plans by an employer. Employees who are automatically enrolled in DC plans do not have to actively choose to enroll in the program, but may opt out, if they so choose. Automatic escalation incorporates the idea that as an individual's income increases, their retirement savings should increase as well. For example, some automatic escalation programs may be set up to increase the amount withheld from one's paycheck by an additional 1 percent of payroll each time the employee receives a raise. With the passage of the Pension Protection Act (PPA) in 2006, more employers are now automatically enrolling their participants and implementing automatic escalation. This is encouraging, as recent EBRI research shows that auto-enrollment and auto-escalation can greatly improve many workers' retirement income adequacy.
In terms of fee disclosure, Congress has conducted hearings on the fees paid by employees and plan sponsors in 401(k) and other retirement savings plans. Specifically, there are concerns that current reporting and disclosure practices may be inadequate, and that fees may be excessive. Many believe that more clarity would enable participants to make better investment decisions for themselves. Also, 401(k) fee disclosure may be an effective means of increasing retirement security without costing employees, employers, or the government any money at all. In May, the House of Representatives passed 401(k) fee legislation, and in July the Department of Labor released an interim final rule on fee disclosures.
Finally, DC plans are commonly associated with “leakage” problems, which occur when a participant takes a loan or hardship withdrawal out of a DC plan, or when a participant fails to roll over a DC account balance from a previous job. Recent data from Fidelity Investments suggest that this is a growing concern. For example, in 2010, the percentage of participants either initiating a loan or a hardship withdrawal increased to 11 percent of total active participants, from about 9 percent in 2009. Many experts agree that retirement assets should be used for retirement, and not other purposes; so rollovers between accounts should be encouraged, and loans and pre-retirement withdrawals should be discouraged.
Building New Opportunities for Individual Savings
Another proposal discussed at the conference — and that has gained some interest in Congress recently — is the Automatic IRA (auto IRA), which is an employment-based individual retirement account where workers use payroll deductions to save some of their own money for retirement. It is not an employer-sponsored retirement plan, and does not require employer contributions. Rather, the program is designed to make it easier for those workers whose employers do not offer a retirement plan save for retirement on their own. It is designed for employees of small businesses, nearly half of whom are currently offered no workplace retirement benefits at all.
Some retirement experts believe that the auto IRA would not only benefit low-income workers and those not currently covered, but all Americans, because it is designed to be portable, following an employee as he or she changes jobs throughout a career. The program is also designed to be much more easily understood than IRAs are today. (Perhaps as a result of these issues with the current IRA market, only about 10 percent of workers contribute to an IRA account.) Since the NIRS conference, the Automatic IRA Act of 2010 has been formally introduced in the Senate.
The bipartisan, solutions-focused dialogue at the NIRS policy conference was proof that thoughtful people can agree on common sense retirement solutions, even if they are approaching the problem from diverse vantage points.
Policymakers would do well to engage the broad community of retirement plan sponsors, academics, experts, employee and retiree representatives, and the financial industry to quickly identify solutions for rebuilding retirement security. They will find that we do not suffer from any shortage of ideas. Rather, the more difficult, and necessary, task is strong leadership that will translate these ideas into action.
Now more than ever, strong leadership is needed to ensure that more Americans are able to achieve a secure retirement after a lifetime of work — and it's not just the policy wonks and retirement experts who think so. NIRS research finds that ordinary Americans support a range of policy solutions to enhance retirement security.
In other words, Americans are looking to Washington — and retirement industry leaders — for sensible solutions that work. If our leaders act soon, perhaps we can rebuild the road to retirement in a way that simultaneously benefits employers, employees, and the economy.
Ilana Boivie, the author is an economist and serves a director of programs of the National Institute on Retirement Security, Washington, D.C.