Expanding what works in a new era of retirement savings
With the 2016 presidential campaign underway and tax reform under serious discussion on Capitol Hill, it’s time to take our national retirement system to the next level.
Despite the progress made in workplace savings over more than three decades, the ability to meet retirement goals is still out of reach for millions of Americans. In fact, the Government Accounting Office recently found nearly half of all households over the age of 55 have no retirement savings, such as in a 401(k) plan or IRA.
The retirement savings challenge may seem daunting to some observers, but we have the solutions to improve it.
Workplace savings plans have experienced a dynamic and distinctive evolution. The first generation — or Workplace 1.0 — saw the initial explosion of defined contribution (DC) plans from the mid-1980s to 1990s. Participants saw a rapidly increasing array of investment choices, but had little guidance. The second generation — Workplace 2.0 — began in the mid-1990s, when plan sponsors began to explore target-date funds and design features such as auto enrollment, in response to research on investor behavior. The third era — or Workplace 3.0 — continues today. This iteration grew from the Pension Protection Act of 2006, that codified a series of plan designs, like auto enrollment and savings escalation, and provided solutions that strengthened savings accumulation and improved retirement readiness.
Today, with 10,000 baby boomers moving into retirement every day, we’re entering a new phase in the evolution — Workplace 4.0. We have to seize the opportunity to build out best practices, take the DC system to a new level, and solve the new challenge: lifetime income distribution.
Call to action
The top priority on the Workplace 4.0 agenda is the “access gap.” There are more than 22 million households who do not have access to a retirement savings plan at work.* Even with Social Security, these workers will experience a significant reduction of income in retirement.
Closing this “access gap” should be a prime focus for retirement policy, and ideally dealt with at the national level. Numerous proposals have been offered and the solutions can be found by supporting legislative and regulatory efforts through Auto-IRAs, multi-employer plans, or the creation of “starter” or simplified 401(k)s.
Policy can encourage employers to help narrow the gap. Providing generous and refundable tax credits could help more employers sponsor plans, and engage the growing share of the workforce without access to a payroll deduction scenario, including part-time or contract workers.
One of the best roads to prepare workers to potentially replace their earned income runs through the workplace. There are many improvements that can be made across the existing system.
- Regulators and legislators need to guide or even mandate the adoption of full-auto plan designs. Research shows these designs enhance retirement readiness. To get a full-auto system will require new legislation and stronger legal safe harbors for plan sponsors.
- The Treasury is already leading the way to make it easier for workplace plans to include guaranteed income options such as annuities, partial and deferred annuities and guaranteed draw-down plans. We need to advance those efforts. To spur the adoption of these solutions, a tax preference could be established to allow workers to draw the first $10,000 a year in guaranteed income tax free.
- Congress could deliver major help to millions of retirees by allowing tax-free withdrawals from qualified plans to cover medical expenses and health insurance, with rising costs presenting another challenge for savers.
These changes would go far in building out the next generation of workplace savings into a more robust private savings system to supplement the baseline almost all Americans rely on: Social Security. Action by the President and Congress to make Social Security truly solvent would provide a massive jolt of confidence to Americans.
This is a time for leadership and vision from our political leaders, including presidential candidates, and from the financial services industry. All of us in the workplace retirement arena – from policymakers to media, thought leaders, and industry – should lift our sights and adopt a larger vision of what we can accomplish for the nation.