Commentary: Retirement plan service providers want to maintain the workplace retirement system status quo. Unfortunately for them, a few influential groups want the system to change. These groups include federal and state lawmakers, public policy experts, and the media. All have specific proposals and recommendations to increase access to workplace retirement plans. In addition, some want to change features of these plans that they feel are not in the best interest of low- to middle-income workers.
Federal and State Government
In January 2014 the White House announced the creation of the myRA (my retirement account) program aimed at workers without access to a workplace retirement plan. The program became operational in late December 2014. Currently workers can only create a myRA account via their employers payroll deduction program. New methods of starting an account are coming. In addition to the Administrations new retirement program, the U.S. Senate is exploring ways to improve worker retirement savings through the SAFE Retirement Act of 2013 and the USA Retirement Funds Act of 2014. Both bills focus on improving plan access and simplifying plan administration.
State governments including Arizona, California, Nebraska, and 14 other states have retirement plan legislation in various stages. On January 4, 2015, the state of Illinois became the first state to pass a law establishing a retirement program for individuals in the private sector without access to an employer sponsored plan. The Illinois Secure Choice Savings Program is mandatory for employers with 25 or more employees and in business for at least two years. It goes into effect in mid 2017.
Public Policy Experts and the Media
Several public policy experts and the media continue to express concerns about 401(k) style retirement plans. Labor economist Teresa Ghilarducci writes that these plans are too complex and risky. She proposes replacing them with government run retirement accounts. And while most media accounts of workplace retirement plans are favorable, one highly acclaimed one was not. Martin Smiths award-winning documentary for PBS, The Retirement Gamble, received a lot of attention because of its criticism of plan fees and expenses.
The retirement services industry is not completely opposed to making changes to 401(k) style plans. It has championed use of automatic enrollment, automatic escalation, and target date funds. These are good changes to support that can have a positive impact on worker retirement savings. But they should not stop there?
If the retirement services industry wants to shed its predatory image, it needs to support substantial changes to 401(k) style retirement plans. Changes the industry can support include:
- Mandatory employer contributions
- Standardized fees and elimination of revenue sharing
- Simplified investment options
Mandatory Employer Contributions. An employer is not required to make a contribution to the 401(k)-style retirement plan it sponsors. And if it does make a contribution, it can terminate it whenever it chooses. Or it can change the timing of the contribution from per pay period to annual with only employees employed on the last day of the year receiving a partial or full match.
The retirement services industry should support required employer contributions to employee 401(k) retirement accounts. Employer contributions incent workers to make their own contributions. They increase employee retirement savings. In addition, they represent compensation for years of work. And they dont have to break the bank. They can be limited based on employee contributions and household income.
Standardized Fees and Elimination of Revenue Sharing. Retirement plan administrative fees and fund-level expenses eat away at retirement plan balances. The higher the fees and expenses, the more significant the reduction in retirement savings Conversely, the lower the fees and expenses, the lower the reduction in retirement savings.
Retirement plan service providers should support a flat dollar administrative services fee per participant. Fees for the same service based on the account balance penalize workers who save more. In addition, they should support the elimination of revenue sharing in all 401(k) style retirement plans. Revenue sharing is an expense mutual funds add to their funds to pay third parties. This opaque practice of fees gives the appearance of doing something underhanded. If mutual funds want to add fees to their funds they should do it in plain sight.
Simplified Investment Choices. The average number of investment options in 401(k)-style plans is 19. But research shows that having too many options makes workers less likely to make a decision at all. Or they make poor decisions by spreading their contribution over a large number of options.
Retirement plan service providers should support limiting the amount of funds offered. Plan administrators should focus on the quality of the funds and not the quantity. They should also support providing professional allocation guidance to all plan participants. Workers are not investment professionals.
Government, public policy experts and the media are all shining a critical eye on 401(k) style retirement plans. And no wonder since these plans are approaching nearly $5 trillion in assets. These groups want to improve retirement plan access and outcomes. Retirement plan service providers should work to improve workplace retirement plans too.
Denise Perkins runs Benefits All, a benefits-focused consultancy.
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