The modern defined contribution retirement savings plan—what most people today know as a 401(k)—is now three decades old. Its close cousins, 457 and 403(b) plans, have been around even longer.
We’re still trying to get them right.
The problem? While Americans held approximately $6.8 trillion in defined contribution plans at year-end 2014, according to the Investment Company Institute, studies consistently show that many Americans are not on track to a financially secure retirement. A report by the National Institute on Retirement Security indicates that about 40 percent of working households with members between the ages of 25 and 64 have no retirement savings. Where they do, the median balance for households with workers approaching retirement age is just $104,000.
Among those looking to improve this picture is Judith Mares, deputy assistant secretary for the Department of Labor’s Employee Benefits Security Administration. In an address to the 2015 SVIA Fall Forum, Mares identified seven areas where regulators and retirement plan providers could make defined contribution plans work harder for plan participants:
Introduce and improve “decumulation” options. For decades, Mares said, the retirement industry has been focused on helping plan participants accumulate assets for retirement, with retirement plans developing sophisticated “accumulation menus” offering a wide range of investment options. Now, with the baby-boom generation beginning to retire, she said plans must develop sophisticated “decumulation menus” offering participants a variety of ways to convert retirement savings into a steady stream of income.
Promote keeping plan participants in their retirement plans after they stop working. “I’m not convinced participants value their plan,” Mares said. “We know they value their [employer] match, because we spend a lot of time educating people to maximize it. But I’m not convinced everyone values that they can get a stable value fund in a defined contribution plan, and can’t get that anywhere else—even though when you’re living on a fixed income it’s a tremendous asset to have that option. And I’m not sure participants value the institutional fee structure that comes with their plans.” Mares said the retirement industry needs to mount a campaign to get plan participants to understand the full value of their retirement plans, including the value of having a plan fiduciary select and monitor investment options. At the same time, she said, plan sponsors should make sure the paperwork they give plan participants upon retirement doesn’t encourage them to leave their plan.
Make it easier for participants to roll assets from a previous employer’s plan into their current employer’s plan. Keeping tabs on one plan is easier than keeping tabs on multiple plans, especially once it’s time to start taking withdrawals. “Not all plans are designed for roll-ins,” Mares said. “We indirectly nudge people out.”
Make retirement plans more widely available. Despite the seeming ubiquity of defined contribution plans, only about half the U.S. population has access to one in the workplace, Mares said. Most who aren’t covered are self-employed, work part-time, or work for small employers. “This is a systemic problem,” she conceded. “If it was easy to solve, it would have been solved by now.” Mares noted that a number of states have passed or are developing laws requiring employers to enroll their workers in a state-sponsored plan and facilitate their contributions via payroll deduction. Meanwhile, President Obama has directed the Department of Labor to look at how states can create plans that aren’t preempted by the Employee Retirement Income Act and all of its regulations. “That guidance is in the works,” she said, “although I can’t talk about specifics.”
Help Americans understand whether they are on track to have enough retirement savings. In 2013, the Department of Labor proposed requiring that retirement plan statements show participants not only how much is in their account but also what that amount would represent as an estimated lifetime stream of payments once they stop working. But before a federal agency does any rulemaking it must do a cost-benefit analysis, Mares said, and so far EBSA has not been able to document the benefits of showing account balances as a lifetime income stream. She encouraged SVIA members to research whether it prompts participants to save more. In the meantime, she noted, many participants already get some form of this information. A recent survey of 15 plan record-keepers found 14 already offering some form of lifetime income disclosure.
Promote greater use of annuities within defined contribution plans. Mares said that when she was working in the corporate world she championed making annuities available within retirement plans. She still does, but concedes that many sponsors haven’t done it because they worry, among other things, that they will be on the hook as a fiduciary until the last dollar is paid out from an annuity. But Mares said there is a statute of limitations on a sponsor’s fiduciary liability for selecting an annuity provider, and she encouraged plan sponsors to allow participants to directly annuitize some of their retirement assets while still in their plan.
Make it easier for unemployed workers to take loans from retirement savings plan. Retirement professionals routinely warn against withdrawing money from a retirement savings plan before retirement, but for plan participants who have lost their jobs a loan may make more financial sense than making an outright withdrawal that incurs taxes and penalties. While many plans don’t allow participants who are unemployed to take loans from the plan, Mares said they should.
Mares acknowledged that what her audience most wanted to hear about—the DOL’s proposed new fiduciary rules for anyone giving advice to retirement plans and IRA holders— was one where she couldn’t offer much insight, given that the department has yet to publish final regulations. But she did offer that more than 5,500 written and verbal comments from the public made it clear that most people believe anyone touching a retiree’s investment dollars should act in the retiree’s best interest.
That said, she conceded the department also heard many concerns about the workability of the proposed rule changes, which in part is why it has included in them a “best interest contract exemption.” Among other things, that exemption would allow entities such as broker-dealers and insurance agents to continue receiving compensation from third parties under carefully prescribed circumstances, and with substantial disclosures when doing so might present a conflict of interest. Mares also assured her audience that the department had heard their concerns about how that exemption might function, and is working on getting the logistics right.