Not too long ago, talk of a retirement crisis, the reaction, more often than not, was “I'll believe it's a crisis when people start acting like it's a crisis.”
In the past year, the conversation has come forward and grown louder. And just last week in connection with his State of the Union address, President Barack Obama announced a combination of executive actions and legislative proposals to help address the crisis — bringing particularly welcome focus. Most encouraging was that he placed what he called the “three-legged stool,” the combination of employer-sponsored plans, Social Security and private savings, at the heart of a solution. All three legs need to bear weight in order to provide the proper balance.
If there is any single statement regarding retirement around which you could probably find universal agreement, it is this: People are not saving enough for retirement. The reasons people are not saving are many and varied, and it is important to understand them in order to help nudge people into better savings behavior. That is one of the reasons that MyRA, which the president has directed the Treasury to create, is so intriguing.
Consider many of the behavioral barriers to savings, especially among lower-wage, less investment-savvy workers. They are afraid to get started because they are concerned they may need the money. They may be intimidated or confused by financial services and are reluctant to seek advice. They also tend to be very risk averse.
MyRA addresses these barriers directly. Since the savings are not pretax, there is no fear of paying an early withdrawal penalty. MyRAs would be opened through employers, with a very low initial investment. Contributions would be invested in a special Treasury security that guarantees a return of principal.
While the level of return of by these Treasury securities may not sound attractive to some seasoned investors, consider the example of NEST, the U.K. government-sponsored DC plan. The British government's research concluded that investment losses drove younger workers out of the markets. Creating solutions with lower investment risk levels for younger workers helped them build up the habit of saving. MyRA is trying to do a similar thing — it is educating people on how to be investors while letting them build a nest egg that can be more properly diversified later.
If MyRA can help encourage the shift into retirement savings, it is to be applauded as an important step forward. Also intriguing is the proposal for auto enrollment into IRAs for workers whose employers do not offer retirement plans. The details would need to be worked out — and the latter would require congressional action — but at the very least, both proposals target people who are outside the workplace retirement system and are very likely to have little or no retirement savings.
Beyond the proposals the president announced in his speech, there are a range of other steps we can take at both the state and federal level. California's Secure Choice Plan, for example, would help small businesses provide retirement options by pooling the assets of private-sector workers. We also believe that the federal government should examine ways to reduce the regulatory burdens for small business that want to offer retirement plans. And down the road, we should explore a mandatory savings plan for all Americans, along the lines of Australia's superannuation program.
A key part of these efforts should be taking a fresh look at the Pension Protection Act of 2006. The PPA is rightly considered a watershed moment in retirement planning. In a sense, it was a perfect alignment of the retirement industry and regulators. It recognized trends that were already gathering steam, such as the move toward target-date funds and automatic features, and provided important fiduciary protection that allowed plan sponsors to act in the best interest of their employees.
The PPA worked. Today, younger workers are increasingly defaulted into diversified funds at a reasonable deferral rate. However, the unintended consequence of the PPA is that it locked in the best thinking of 2006, which has had a dampening effect on future innovation and plan design. There has been no shortage of ideas for the next generation of DC solutions, especially around retirement income, but plan sponsors are understandably concerned that they may shift outside the fiduciary protection provided by the PPA if they try to enact something new.
By providing guidance on retirement income solutions and broadening the protections provided in the PPA, we would let new ideas emerge that could be tested in the marketplace and play their role in lessening the retirement crisis. Likewise, states and municipalities working to balance their commitments to public servants and taxpayers alike, could find new support for hybrid plans that combine features of defined benefit and defined contributions plans that could be sustainable for decades.
The president has invited all of us into a national dialogue about one of the most urgent challenges we face. We cannot afford to miss this opportunity to speak out and push for meaningful changes. As a nation, we clearly have a lot of tough choices to make over the next few years. But employers, retirement providers and regulators are showing an encouraging willingness to engage with the problem, and together we can tackle the retirement crisis.