The idea of retirement plan leakage was prominent at Pensions & Investments' East Coast Defined Contribution Conference March 10-12 in Miami, leading one keynote speaker to outline a list of ways to increase the savings of plan participants.
“Leakage is enormously important,” said David Laibson, the Robert I. Goldman Professor of Economics at Harvard University, Cambridge, Mass., and the conference's opening keynote speaker. “One out of two dollars is leaked before retirement … Participants need to ramp up savings because leakage is probably here to stay.”
Mr. Laibson told the DC East audience — the largest ever for a P&I DC conference — that the savings system works in theory, factoring in appropriate employee contributions, employer matches, Social Security and retirement drawdown. However, “the problem is the savings system is not working,” and the reason is leakage, which has proven not to be a product of the recession, Mr. Laibson said.
Total leakage increased to more than $80 billion in 2007 from $60 billion in 2004, but the leakage rate only grew 2.5% during the recession years, from 2007 to 2009. However, once the recession ended, that leakage rate increased 24.9%, or more than $110 billion, in 2010, the most recent data.
James Delaplane, Washington-based principal, government relations, at Vanguard Group, speaker for the conference's final keynote address, said leakage is “coming up the policy ladder” in exploring where it is coming from – loans, hardships or cashing out when leaving a job.
Mr. Laibson discussed several steps plan executives can make to increase savings from participants, including increasing the default savings and auto escalation rates — “6% is the new 3%,” he said. Another idea picked up by several speakers and panel discussions throughout the conference was the idea of increasing the match threshold, for example, to 10% from 6%, but while lowering the match rate to produce a cost neutral scenario for employers.
“It will give a better message to save more,” he said.
Leakage and inadequate retirement income in general are not the only reasons savings habits have to improve, Mr. Laibson said. The new 401(k) landscape covers much more than just retirement these days; it also covers down payments, education, medical bills and rainy day money, so participants need more money in their accounts, Mr. Laibson said. He said the net national savings rate since the 1950s is “on a tear to zero.”