Don’t “protect” workplace savings plans — require them. In the Employee Retirement Income Security Act of 1974, Congress imposed pension standards on employers without requiring employers to offer pensions. In hindsight, that was a big mistake: 40 years later, many fewer employers offer pensions and most don’t offer anything at all. The PPA made it worse by tightening those standards.
As long as offering workplace savings is voluntary, most businesses won’t do it — and we’ve learned that if savings isn’t done automatically via paycheck, it rarely happens at all. What’s needed is to require employers to enable payroll retirement savings without making them fiduciaries and without requiring them to contribute themselves. This can be done by:
• Expanding Social Security, with appropriate tax increases. This approach is used by most other developed nations.
• Automatic enrollment in a retirement plan, giving individual employees the ability to change their savings level or opt out entirely. This “secure choice” approach is being implemented in California and other states.
Neither approach is moving in Congress. The only bipartisan proposal would let the financial services industry market retirement plans to multiple small businesses — but wouldn’t require them.>
Don’t “protect” against lifetime income — encourage or require it.
The shift from traditional pension plans means most folks get a lump sum when they retire; as a result, many more people will exhaust their retirement savings.
Putting a portion of retirement savings back into lifetime income would help, but the PPA made that hard to do. The PPA allowed companies to set up a default investment option. To “protect” people from choosing unsound or expensive annuities, PPA set a higher standard. If companies want to include them in 401(k)s, they must warranty both the providers and their fees. Unsurprisingly, companies look at this and run the other way.
We can do better. We could stop discriminating against lifetime income and start encouraging or even requiring it. Several years ago, United Technologies Corp. started including lifetime income within its target-date default 401(k) option. Why not make that the “safe harbor” so others join them?
Protect consumers against bad retirement plans, not “bad” employers.With the focus on employers, there’s been little attention to retirement products themselves. There are no useful disclosure standards — much less requirements — on fees, on how much lifetime income a retirement plan might provide, or investment risks.
The departments of Labor and Treasury share responsibility for retirement policy, but neither has ever provided useful consumer standards for the tens of millions who are now forced to decide themselves how much to save, how to invest, and how much and how quickly to use the assets in retirement.
The agency that could do so, the Consumer Financial Protection Bureau, has been prevented by Treasury and Labor from using its expertise. If the two departments agreed, CFPB could help in what is, after all, the single most complex consumer financial transaction. Without real consumer standards and consumer protections, we’ll continue to have financial service providers offering sophisticated products to an unsophisticated populace. By the time folks understand how little retirement security they’ve purchased, they’ll be too old to do anything about it.