Friday, January 3, 2014

Why Is Our 401(k) Industry on the Defensive?

Most of us have heard the expression “Don’t shoot the messenger.”  In other words, the bearer of unwelcome news may not be the cause of it and shouldn’t be blamed or punished for delivering it.  Sadly, our retirement industry, and in particular those associated with 401(k) plans, have at times been the victim of “messenger blame,” particularly with respect to American workers’ retirement readiness.
To our credit, most of us have for a very long time been telling Americans that they should save more.  That was and still is true.  But in addition to our intended audience, among those who have been listening are members of the media, and academics in think tanks and ivory towers.  They have been listening and passing judgment, not only on the wisdom of our message, but on our performance as an industry.  Some, instead of attributing inadequate saving to workers’ personal choices, to economic forces, or to employment circumstances, have eagerly and loudly blamed us.  By “us” I mean not only the professionals working in the retirement services and investment industries, but—by association—the defined contribution retirement savings vehicles that are most readily available to American workers. 

We will not address professional performance here, knowing as we do that the honest majority of retirement professionals are not trying to fleece savers with outrageous fees or commissions, inadequate disclosure, or by swindle of any variety or flavor.  Such sins are nowhere near as common as some critics would have the public believe, and there are sound regulations which—if enforced—will bring into line those who have fewer scruples and weaker ethics than the majority of us.
We will address here some of the common themes of criticism of the retirement plans currently available to the American worker, and comment on the job that they are doing to prepare Americans for retirement. 

One criticism is that automatic-deferral 401(k) type plans have not yielded participation and saving as expected, and in some cases contributions have actually declined.  That is truly a red herring.  In some plans deferral rates HAVE seen declines, at least temporarily, when participants who were already deferring substantially did not affirmatively “reset” at their previous deferral level.  What has also happened, however, is that more participants are actually deferring in these types of plans.  What our industry has or should have learned from this is that communications between employers and plan participants needs to be better.  And proper plan design with these types of plans is critical.  Going forward, an automatic-increase feature will be a valuable tool when more employers implement it.
Another criticism is based on an ideal that could be called a pipe dream, or a pie-in-the-sky vision, if one were to be uncharitable.  It is a vision that primarily comes from academics who lead retirement research or learning centers within prestigious universities; who, incidentally, typically have access to pension plans with post-retirement benefit guarantees not dependent on the whims of the economy, or on the investing skill of the employee-participant.  Some such experts advocate a combination of mandatory employee contributions paired with government-funded payments, which together would yield assured post-retirement benefits for each of us.  One needs only look toward the use of defined benefit pension plans of late to gauge the likelihood of such a plan from an economic standpoint.  More importantly anyone who has paid any attention to the politics of our time knows that there is very little political viability in a government-run, enforced-saving program with taxpayer funding.  Ivory towers are called that for a reason.  They can be divorced from the realities that happen at ground level in our every day world.  We would all love to have a retirement plan that provided guaranteed retirement income but the economic reality and the political calculus to "mandate" such a plan is not there; certainly not now and likely not for a long time to come. 

Last to be addressed here are the numbers that tell us how we are doing as a nation of savers.  Or, as we are often told by critics, non-savers, as the case may be.  The first order of business is a confession.  The retirement industry and American employers cannot guarantee everyone a secure and well-funded retirement.  There is no free lunch, no magic bullet, no easy solution to saving enough for retirement. 
But the numbers we see tell a glass-half-full, rather than a glass-half-empty story.  According to data from a study by the American Benefits Council, the Investment Company Institute and the American Council of Life Insurers, almost 80 percent of full-time workers have access to a retirement plan.  More than 60 percent of full-time employees actually do make or receive retirement plan contributions.  Among those who are participating, those closest to retirement—age 60-64—have an average of more than $350,000 accumulated in defined contribution plans and/or IRAs. 

Does this provide a retirement solution for all, including the unemployed and all part-time workers? No.  Are accumulations equal for everyone who is saving? No, they are not.  Could there be improvements in retirement plans, and the associated investment and administration functions that go with them?  Probably.  But let’s not be so preoccupied with the pursuit of the perfect that we fail to appreciate the good in existing retirement saving options, and the great amount there is of it.