Consensus is Growing Among Industry Stakeholders and Policymakers Around Addressing America’s Greatest Retirement Challenges
By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer
It has been a frustrating time in the defined contribution (DC) plan industry when it comes to retirement legislative reform. Despite an apparent bipartisan consensus that retirement needs legislative action, the Setting Every Community Up for a Secure Retirement (SECURE) Act passed the House 417–3 but has not passed the Senate. Industry pundits and insiders keenly anticipate passage of the SECURE Act, particularly due to two notable inclusions:
- Provisions encouraging and facilitating DC plans to support participant retirement income needs. In particular, SECURE has a “safe harbor” for plan sponsors offering an annuity option through their plan; and
- Allowances for open multiple employer plans (open MEPs), which are intended to provide more efficient (both cost and time) retirement-plan management. The legislative focus is on smaller employers, but larger sponsors may also benefit. Since a third of Americans in the private sector do not currently have access to an employer-sponsored retirement plan, open MEPs have the potential to help extend retirement coverage.[1]
While we wait for SECURE to pass, which we still hope may happen later this year or in the near future, several other important retirement initiatives are underway. Senators Rob Portman (R-OH) and Ben Cardin (D-MD) and others are working on a second legislative proposal to further enhance retirement legislation by encouraging higher auto-enrollment savings rates, expanding coverage, and reducing administrative burdens.[2]
Other stakeholders across the industry are discussing how to address the retirement challenge. One is the ASPEN Institute Financial Security Program, which earlier this year hosted a Leadership Forum on Retirement Savings composed of roughly 70 representatives from industry, government, academia, and advocacy groups.
A Rapporteur’s Report from this year’s Forum, “The Time is Now: Next Steps Toward a More Secure Retirement for All Americans,” has just been released outlining five action steps most ready for advancement:
- Expand mandated savings programs that are already testing successfully.
- Expand saving options for short-term emergencies.
- Create alternatives to retirement plans tied to a single employer.
- Develop retirement products and policies that account for increased longevity.
- Make it easier to track and roll over accounts when switching jobs to stem retirement plan leakage.
Items 1 and 3 above clearly address the fact that a third of American private sector workers do not currently have access to a retirement plan[1]. In terms of the mandated savings programs, the Employee Benefits Research Institute (EBRI) recently used data from the OregonSaves program to forecast how the estimated $3.83 trillion U.S. retirement deficit would reduce if a similar program were rolled out nationally.[3] By EBRI’s reckoning, a national OregonSaves program would reduce simulated retirement deficits by $456 billion, or 12% of the $3.83 trillion retirement savings gap. Furthermore, we have seen some action with the Department of Labor (DOL) issuing new regulations governing Association Retirement Plans. In addition, many of us in the industry are positive on what open MEPs could do in terms of being a catalyst for innovation in the retirement industry. For this to become a reality, SECURE needs to pass (fingers crossed).
Less than 40% of Americans cannot cover an unexpected expense of $400.[4] Plan sponsors are often concerned about the proliferation of DC-plan loans, because they often lead to suboptimal savings outcomes if people leave the employer before the loan is paid off. In our view, a mechanism to deal with unexpected or emergency expenses is critical. Many of our clients have expressed interest in these options, only to be disappointed when we pointed out some of the challenges to integrating DC plans with auto-enrolled side-car savings accounts. (This paper, “Building Emergency Savings through Employer-Sponsored Rainy Day Savings Accounts,” discusses many of these challenges.) On a positive note, several legislative initiatives are trying to address some of these challenges; however, they likely will have to wait until after SECURE passes. In the meantime, some recordkeepers have developed opt-in functionality to allow participants to direct a portion of their contributions to a short-term savings account.
With regard to addressing increased longevity, above, we have seen DC plan sponsors exercise a concerted effort to move from plans being purely accumulation vehicles to include strategies for preserving and consuming retirement assets. While this issue has been discussed for many years, more plan sponsors seem to be moving from “lots of talk, no action” to “action.” The Defined Contribution Institutional Investment Association (DCIIA) recently released a series of papers focused on the “Retirement Tier.” The series explores the Retirement Tier’s potential benefits and challenges, and offers plan sponsors a roadmap for implementation.
Finally, tracking and rolling over accounts to avoid leakage when employees change jobs is critical to maximizing savings. Leakage occurs particularly when the cash-out amounts are small and likely forced. Some of this leakage could be avoided if retirement assets were consolidated — there is less likelihood of force-outs if the amounts are higher and experience shows that voluntary cash-outs are far less common with larger amounts. The Department of Labor clearly sees the potential benefits of auto-portability. The Department of Labor recently approved an auto-portability program with Retirement Clearing House (RCH), whereby the participating employer’s plan automatically could roll a participant’s balance to a default IRA, and RCH will then automatically roll the default IRA to the participant’s new plan. RCH’s intention is to roll this program out more extensively in 2020.
While we may be struggling to get retirement legislation through Congress, it’s encouraging to see growing industry and public policy consensus around many of the most critical issues facing Americans’ greatest retirement (and financial) challenges.
[1] U.S. Bureau of Labor Statistics, Employment Benefits in the United States, March 2019, USDL-19–1650.
[2] “Newly Introduced Cardin-Portman Retirement Bill Receives Widespread Praise,” Press Release, cardin.senate.gov. May 20, 2019. https://www.cardin.senate.gov/newsroom/press/release/newly-introduced-cardin-portman-retirement-bill-receives-widespread-praise
[3] Jack VanDerhei, “What if OregonSaves Went National: A Look at the Impact on Retirement Income Adequacy,” EBRI Issue Brief, no. 494 (Employee Benefit Research Institute, October 31, 2019).
[4] U.S. Federal Reserve, Report on the Economic Well-being of U.S. Households in 2017 (May 2018).
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