I’ve spent my entire career working with retirement plans, beginning with an internship my senior year of college. Looking back over that period of time, it’s remarkable how much has changed. And yet, sitting here perusing the still-damp ink of the SECURE 2.0 Act of 2022, it’s incredible to think about how much has yet to change. There are those who say the first human to live to be 150 is already living among us, and that “retirement” – a term that many say needs refinement – looks to be as long as our working careers.
When I think about the retirement plan of the future, I think of four key attributes. It needs to:
- Be universally available
- Let individuals start setting money aside as early/quickly as possible
- Provide a simple, cost-effective option for investing
- Provide a simple, cost-effective option for eventually drawing down those accumulated savings
Much of this is already in place, and some is just now coming online. Others are perhaps far down the road. And yes, human beings being what they are, we may need to do more than just “nudge” or cajole. Here’s some thoughts.
First Things First
First and foremost, Social Security and Medicare need to be shored up. With all its funding shortcomings and demographic challenges, Social Security remains a primary, and in many cases, sole financial resource in retirement and for many looking ahead to that date. The solution is straightforward – raise FICA withholding rates and/or the income levels to which those rates are applied, or means-test and/or reduce benefits. However, the cost and will to do so remain lacking.
There are those in favor of basically turning our current private retirement system into an “uber” Social Security program. While I appreciate the allure, a government-only solution seems ripe for political temptations to, as politicians are wont to do, promise more than can be paid, continually kicking that hard decision down the road to the next election. Some continue to call for an expansion of those benefits and coverage, and if you’ve ever checked out the annual benefit projections you can appreciate that perspective. But it seems likely that we’ll need to spend some significant part of the next decades assuring that the commitments already made can be fulfilled. It is, quite simply, “job #1” – and a foundation upon which everything else depends. So my retirement program of the future assumes that we will shore up Social Security’s finances, tighten up our definition of its purpose and goals, and let it do what it has done so well for America’s retirees. The sooner the better.
Expanded Coverage/Access
The current private retirement system works well, but only for those who have access to it. Technically, individuals can simply go online and open an individual retirement account, but few do. In fact, data shows that even modest ($30,000-$50,000 salary) income workers are 12 times more likely to save for retirement if they have access to a plan at work. But many, primarily those employed at smaller businesses, still don’t. Our retirement vision of the future has to include universal availability. In the private sector only about half of full-time workers have that opportunity, and that’s a problem.
Now, small businesses are kept pretty busy just trying to stay IN business. But they have the same need to attract and retain talent as the Fortune 50, and a retirement plan benefit can certainly play a role. The recently passed SECURE 2.0 Act of 2022 provides massive incentives to do so. These include tax credits for companies with 50 employees or less that basically make the plan free for the first three years, and for those put off by the potential complexity of providing those benefits, a “Starter K” that’s significantly streamlined compared with the traditional 401(k). There’s a provision that will require new plans of most businesses formed after 12/29/22 to offer automatic enrollment, but that will certainly help those workers save more effectively. My guess is that all this will be effective to some degree but won’t completely close the so-called “coverage gap.”
What might work – and it was considered during the deliberations over the SECURE Act – is some kind of federal mandate. Right now there are about a dozen states that are offering their own mandated savings IRA, but while that certainly benefits those who take advantage, the opt-out rates are huge. Meanwhile, employers seeking to draw workers from those areas are looking at administrative challenges that, at best, are “bothersome.” While many don’t like the notion of government “mandates”, what we’ve seen from the state mandates is they at least prompt a discussion about the advantages of a full-blown 401(k), and the Starter 401(k) design matches up nicely against the state-run versions. I fully expect to see future moves to provide for universal availability (just don’t call it a mandate!) of these programs so everyone has at least the opportunity to save for retirement.
Retirement Income Outcomes
It is ironic that retirement plans designed to provide income in retirement do such a poor job of providing income in retirement. You can argue that the focus of these plans is to help workers accumulate savings FOR retirement, and after that they’re on their own. But there’s plenty of evidence to support the need for helping workers save and invest properly. And trust me, that’s a lot simpler than trying to figure out how to structure withdrawals in retirement.
All one has to do is look at the tremendous success of target-date funds – not only in the rate of adoption by plans and participants, but in how much better diversified 401(k) accounts are today versus a generation ago when everybody was making individual investment decisions. Already popular, that pace of take-up was spurred by the guidelines contained in the Pension Protection Act of 2006 and subsequent guidance from the Department of Labor. The question that needs to be answered is how/can we do something similar for helping get those retirement savers invested in a retirement income solution. Perhaps more critically, how can we get plan sponsors comfortable enough with the concept to adopt it the way they have with target-date funds.
To help address concerns about portability, the original SECURE Act took several key steps. These included how a retirement income account could be transferred during a recordkeeping conversion or employee termination, as well as putting some additional clarity around a safe harbor to provide comfort to plan fiduciaries. At the same time, some intriguing new approaches and refurbished solutions emerged. But then COVID-19 struck, and plan sponsors had much more to deal with than adding a retirement income feature to their plan as they worried about the Great Resignation, navigating the sensitivities around working from home, and volatile markets.
The bottom line is that we don’t yet know if these solutions and the new legislative structures will move the needle here. What we do know is that we need solutions that are cost-effective, relatively simple to explain, and readily available. I know the retirement plan of the future will include those.
Accident “Tell”
While some still maintain that things like the 401(k) were an “accident”, the reality is the past several years have seen dramatic improvements in access, efficacy, and participation in these programs – and it’s not been an accident. Though arguably the list above is not much different from what we already have in place, and in some cases are still building, the retirement system’s traditional three-legs has undergone some needed rebalancing. Let’s face it, there may have been three-legs but they were NEVER equal.
Many factors influence these directions. Legislation certainly plays a role, as does regulation, but ultimately it comes down to having goals, realizing that employers and the workers they employ are dealing with a wide variety of needs and circumstances and trying to find a balance between them. To that end, the guidance and technical assistance of retirement plan advisors and third-party administrators are, and will continue to be, essential voices.
It may not come to be as soon or as well as I hope/think, but it seems to me we’re moving in the right direction(s).
About the Author
Nevin E. Adams, JD, is Chief Content Officer for the American Retirement Association, a non-profit organization dedicated to educating retirement plan and benefits professionals and creating a framework of policy to enable every working American to have a comfortable retirement. He has extensive experience in senior management at large financial services organizations and as a writer, editor and thought leader in the retirement plan industry.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust©, its subsidiaries or affiliates.
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