We have a retirement crisis in the U.S. that I am not convinced financial-wellness initiatives can solve for all corporations. I’m not going to just say it, I’m going to prove it. And, to do that, I am going to start off with a story.
I had two questions for the group I chose to poll:
- Are you worried about being able to retire some day?
- [asked only if the person answered yes to the first], Would you be more productive at work if you felt that you could retire comfortably?
Of 25 people that I asked, 19 answered yes to the first question. Of those 19, all 19 of them said they would be more productive at work if they thought they could retire comfortably when they wanted. Many used words like “much” or “significantly” to describe the additional level of productivity they would have at work.
Where was I? I wasn’t in a coffee shop or internet café where I might have expected answers like this. I was in the premium lounge of a major airline in a major airport. The occupants of a lounge like that during the morning rush tend to be successful businesspeople. But they are worried about their future retirements. And, that really makes me wonder how the typical employee at the same companies must feel.
Is this reality? I don’t know. But, it does represent their perceptions, and perception truly is reality.
What does that tell me?
Yes, Virginia, we absolutely do have a retirement crisis in the U.S.
I didn’t need my little survey to know that, however. I can look at the data produced by the Economic Policy Institute, a Washington-based think tank that produced an excellent research-based piece entitled The State of American Retirement Savings—How the Shift to 401(k)s Has Increased Gaps in Retirement Preparedness Based on Income, Race, Ethnicity, Education and Marital Status. In other words, we don’t simply have a retirement crisis, but we have a retirement inequality crisis.
Let’s consider some of the data that EPI culled:
- Retirement savings have stagnated in this millennium.  Ibid, Chart 4.
- While other data suggest that mean retirement savings may be growing rapidly, median retirement savings are not.
- Participation in 401(k) is skewed toward higher-income white Americans while pension participation is fairly equally balanced by age, gender and ethnicity.
- The gap between the retirement haves and have-nots has grown since the recession. And, while EPI doesn’t tell us this, I will say that this coincides with a continuing large number of pension-plan freezes.
One of the other things that EPI does not address is the concept of participants being “on track” to retire. While the vernacular around it may change, this is a metric that most of the large recordkeepers and fund managers use. Depending on the assumptions they choose, the results vary, but in my experience, we tend to see that the percentage on track to retire is somewhere between 50% and 65%.
Is this a good result or not?
I think it depends on the lens you use to view it. Proponents of a 401(k)-only system tout the numbers such as 65%. Consider looking at in reverse. Consider that, optimistically, 35% of workers are not on track to retire and, more pessimistically, 50% are not on track to retire.
That is a problem; in fact, I would label it a crisis.
How did this happen? The parents of many of those people are now retired. In fact, they are comfortable in their retirement. But they worked in a far different structure than people today are working. Let’s consider a typical successful worker of 2019.
She makes a good living. If she’s typical, she probably had kids at a later age than her mother did. She contributes to her 401(k), her HSA because she is probably in a high-deductible health plan and a 529 account for her kids. By the time she’s done with all that, she doesn’t have enough discretionary income to do the things she wants to do, so she finds places to cut back. She is stressed. She wants to retire early enough to spend time with her grandchildren. She doesn’t know if she can. She worries about outliving her savings. She worries about how to invest her savings. She spends her days at work worrying about things like this.
Should she invest aggressively? She tried that about 12 years ago and her savings still haven’t recovered. And, about that outliving her savings, her 401(k) plan has no lifetime income options and she has recently learned that purchasing individual annuities is too expensive. She read about the new safe harbor for annuity providers in SECURE, but concluded that, while they allow plan sponsors and their committees fiduciary protection, they do nothing to provide her with reasonably priced lifetime income options. Her company used to have a pension plan, and when it did, she had that reasonably priced lifetime income, but they froze it the year before she started.
Why did they do that? There are likely lots of reasons, but it was part of a trend—a trend caused by cash flow and accounting volatility that made CFOs lose sleep. Their solution was to get their company out of the pension business.
Do CFOs really hate pensions, though? Or, do they simply hate what they viewed the pensions were doing to them and to their companies? I think it’s the latter.
Employees, on the other hand, and that even includes millennials, love pensions. According to a survey from the National Institute on Retirement Security, 74% of millennial state and local employees said a pension benefit is a major reason why they chose a public-sector job, compared to 70% of boomers. Moreover, 84% of millennial state and local workers said a pension benefit is a key reason why they stay in their jobs. Why? They are concerned about having lifetime income protection someday.
Let’s fix the retirement crisis. Let’s do it by having retirement programs that are not burdened with labels. Let’s do it in a way that looks like a 401(k) plan to the CFO, but at the same time provides predictable, safe, lifetime income for the workforce. And, above all, let’s not worry about what we call those plans.
What do we need in order to make this work?
- Predictable and stable costs;
- A program that employees can understand;
- A program that is a differentiator when you are hiring, and one that makes it difficult for your employees to leave to go to a competitor;
- A program that allows you to reward your top performers;
- A program that gives employees a choice between lump sums and fairly priced lifetime income; and
- Most of all, a program that makes employees feel that they will be able to retire comfortably so they don’t spend large parts of their workdays worrying about if they will be able to retire.
It shouldn’t be that difficult. And, in fact, it isn’t. But, you do need to let go of preconceived notions. In order to do that, let’s start with a blank page and design the program that meets all of the needs above—satisfying the CFO, HR and, perhaps most importantly, employees.
Let’s start out by giving everyone two plans. Let’s call them the Investment Plan and the Security Plan. What are they?
The Investment Plan will be a place for employees to save and see those savings grow. It may or may not have a match—that depends on the company’s budget. It is intended that participants will leave their money in there until retirement and then take a lump sum. If they’d prefer lifetime income, there’s the transfer option that we’ll get to later.
The Security Plan will be the primary repository for the company’s money. However, each employee will have her own account. The amounts in those accounts will be professionally invested and will provide a guarantee against adverse investment performance. When an employee retires, it’s assumed they will take an annuity. That annuity is designed to provide lifetime income protection. And, because many retirees are worried about future inflation, employees can elect to buy that with a piece of their benefit. Finally, for those that prefer a lump sum, that will often be available as well.
What is that transfer option? When a participant in the Investment Plan retires, if they would prefer to buy more lifetime income protection, they can transfer all or part of their account from the Investment Plan to the Security Plan and purchase an additional amount at actuarially fair prices.
I suspect that readers are now asking for the design specifics of the Investment Plan and Security Plan. The fact is that those designs are flexible. They can be designed to fit your needs, whether you are looking at this as a cost-conscious CFO or as an employee-focused CHRO.
The point is that we have a retirement crisis. Not enough workers can afford to retire, and the inequality among those who can and cannot is frightening. As the EPI study demonstrates, it’s getting worse, not better, and the 401(k)-only regime only exacerbates the problem.
I call on employees to ask for a better solution, employers to demand the ability to provide one, and for Congress to finally respond and do everything in its power to get us out of these crises. HR leaders must be integrally involved in remedying this ongoing issue. HR should consider how the 401(k)-only regime shortchanges a significant part of the workforce, and should work to help Finance leaders recognize how much better off the organization will be with a stable cost structure that keeps the workforce happy.
John Lowell is a partner and actuary with October Three Consulting LLC in Atlanta. He has worked to help improve retirement incomes for plan participants for 35 years, served as president of the Conference of Consulting Actuaries for 2018, and has represented the U.S. actuarial profession internationally. He can be reached at [email protected].