“There is a reason why we are seeing so many retirement system reform proposals coming down the pike from Washington and the states, and from so many other places and points of interest,” Bob Collie, chief research strategist for Russell Investments, Americas Institutional, tells PLANSPONSOR. “And the reason is that there is still some real weakness in the U.S. retirement system that is proving to be really challenging to overcome—especially when it comes to the basic question of access to a tax-qualified plan option.”
Collie says retirement industry practitioners should not fool themselves into thinking the current retirement planning paradigm is built on unmovable foundations, or that it can’t move quickly enough to cause painful disruption. Even practices that seem set in stone can change fairly quickly, he notes, citing as a prime example the ongoing fiduciary redefinition debate that has caused no small amount of disruption already, even though the new fiduciary rule from the Labor Department is still in proposal form.
Beyond the basic fact that there is an estimated $27 trillion in the U.S. tax-advantaged retirement savings system at a time when federal budget pressures cause perennial partisan gridlock, defined contribution (DC) plans are quickly becoming the bedrock of U.S. workers’ plans for retirement. This is despite the fact that the Employee Retirement Income Security Act (ERISA), which sets many of the federal rules that currently govern both defined benefit (DB) and DC retirement plans, was penned long before the first 401(k) plan was created.
“My message to people in the industry is, given this set of facts, don’t expect lawmakers to leave all that money alone, and don’t expect today’s practices to continue forever,” Collie adds.
Collie suggests lawmakers, regulators and retirement industry practitioners “have made major changes to the way we treat people inside plans.” But he warns this movement—sparked by the Pension Protection Act’s expansion of automatic enrollment and the use of target-date funds and other asset-allocation solutions as a default for participants—hasn’t really helped the huge swaths of people who don’t have good access to investments and are either saving everything in cash, or worse, are saving nothing at all.
Collie notes that total retirement plan coverage figures vary widely according to the source, but one reliable outlet is the Employee Benefits Research Institute (EBRI). Data from EBRI suggests that the act of making a tax-advantaged savings plan available is the single most important driver of retirement success in the United States. According to EBRI’s numbers, when excluding workers younger than 21 and older than 65, as well as part-time workers, the proportion of full-time private sector workers without access to a retirement plan at work is in the range of 39%. This figure seems dauntingly high, Collie admits, but it’s not even close to the worst projections one can find. Many researchers believe the uncovered number is closer to 50%.
“Digging deeper, we see that one of the defining characteristics of this uncovered population is that they work for small companies and they tend to have lower salaries,” Collie explains. “The question that is so quickly becoming top of mind in Washington and in many state legislatures is, what can we do for this unsupported group of people? They’re going to need to retire someday just like everyone else, and right now we don’t have a good answer about how to make that possible.”
Collie says a small set of proposals has developed at the federal level, which seems to get reintroduced every year but has so far failed to get enough traction to move ahead. These proposals vary in how they would impact the tax treatment of retirement plans, and many seem untenable due to their wholly partisan approach to tax reform, but Collie feels plan advisers and sponsors should prepare themselves for eventual movement. (See “Industry Groups Alarmed About Tax Reform.”)
One common element in the proposals, including the tax reform proposal from President Obama, is the creation of more automatic and mandatory access to tax-advantaged retirement accounts for segments of workers currently lacking coverage.
“They have floated some innovative ideas, but unfortunately this type of a major sweeping change is unlikely to get passed at the federal level under the current makeup of the government, so it’s also a very strong trend that state legislatures are picking up these proposals,” Collie notes. “One thing to highlight is that, wherever the conversation is happening, it’s all about coverage and how to expand it.”
Indeed, numerous states are moving to fill the private sector retirement plan void, up to 18 or 20 at Collie’s last count. He says many of the programs are taking a similar shape—establishing voluntary, low-risk, automatic-enrollment retirement savings platforms for workers who currently lack access to retirement savings plans through their jobs.
“The Secure Choice Program in Illinois is a good example for the industry to follow, because they included pretty thoughtful provisions, I think, which represent a lot of the auto-IRA movement across the country,” Collie says. “The notable thing about Illinois’ approach is just how they managed to get from the basic idea of doing this to actually implementing the law much more quickly than other states, such as California and Maryland and others.”
As these efforts unfold, Collie says states typically set up working groups and committees with long deadlines “to examine all this complicated stuff and report back,” either to the legislature or the governor, with some set of recommendations.
“In Illinois, they have been much more aggressive in their approach,” he explains. “Importantly, Illinois is taking the same approach as the other states—creating more automated access to individual savings accounts and automated deferrals. The features aren’t very unique, so it’s going to be a really good archetype for us to watch. We’ll watch how this one goes and it will give us a clue as to whether it’s like to work out in other states.”
Collie says the Illinois program is important for another reason beyond being among the most aggressive and earliest implementations.
“The Illinois lawmakers showed this process is really all about aligning stakeholders and getting buy-in from a lot of different constituencies with interests that are related, but also distinct in some critical ways,” Collie explains. “I was not on the ground in Illinois and it’s just one of the examples we’re following, but they demonstrated that you need the labor unions to be supportive, for example, and you need the state’s business advocacy groups to be supportive of auto-IRAs as well. It’s no small task to align these interests, and to create the system in a way that you get service provider buy-in as well. All of these elements are critical.”