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Archive for the ‘Retirement Reform’ Category

Extend Workplace Savings to all Americans

May 11, 2009

I am sure that many people here and in our industry will have a variety of fresh ideas to improve what I’ve sketched out here today. But let me be very clear. Even if we make all the changes I’ve mentioned, there is much, much more to do in workplace savings. The glass is only half full. More than 75 million of our fellow Americans have no access to any form of workplace savings at all.

We Need Industry Innovation Backed by Public Policy: Part 2 of 2

Here are just a few elements that should be at the heart of the next great step forward in retirement legislation: “The Workplace Savings and Lifetime Income Act of 20-something…” Hopefully, it will happen in 2010 or maybe 2011 — the sooner the better!

We Need Industry Innovation Backed by Public Policy: Part 1 of 2

As we know, academic studies, pilot projects, and early adoption by pioneering plan sponsors preceded every major element of the PPA’s core policies, from auto-enrollment to savings escalation to the use of life-cycle defaults. It is time now for plan sponsors and providers to continue that tradition of innovation and begin acting right now — under current law — to pioneer the best practices that will lift workplace savings to a new level.

Workplace Savings 3.0: Guarantees to Protect Against Catastrophic Loss

Today’s retirees as a cohort draw a major share of their income, roughly two thirds, from pre-programmed sources such as traditional pensions and Social Security. But as we know, both of these sources are shrinking in terms of their ability to replace shares of retirees’ incomes. Each year going forward, future retirees will have to find ways to convert a growing share of their own savings to fill this widening “gap” in programmed income. This is why we believe that all workplace plans should embed options to provide protected and insured lifetime income.

Workplace Savings 3.0: Consistent Returns vs. Market Volatility

Let me illustrate, using hypotheticals, the case for some of the products and strategies we believe should be integrated into future workplace plan design. We looked at how a $100,000 portfolio would have fared over the decade ending with 2008, had it been invested in either the S&P 500 or in an absolute return strategy that actually hit its target of outpacing Treasury bills by 5% a year. As you know, equities rose and fell, and then rose and fell hard again, leaving a net loss of roughly 13% over this time frame.

Workplace Savings 3.0: Next-Generation Plan Design

The goal, as we see it, is to strengthen defined contribution plans and enable them to meet the retirement needs of future generations. To paraphrase Bill Clinton, “Let’s mend them, not end them.” Just as the PPA marked a qualitative change from first generation DC plans, especially by endorsing much better design for the accumulation phase, version 3.0 of workplace savings needs to finish the job that PPA started and extend better design ideas through the distribution phase as well.

A Once-in-a-Lifetime Shock

The “second generation” of workplace savings had only really begun to take off when we were struck by the great “black swan” event of 2008, a once-in-a-lifetime market shock. Equity markets not only fell more than they had since the 1930s, so did many fixed income markets and even commodities in a rare, deeply damaging correlation.

Workplace Savings 2.0 — The PPA Nudge

What PPA did in terms of its impact on the defined contribution system was give a nudge to plan sponsors and providers to adopt the best practices that were already emerging in cutting-edge workplace plans. We might call this new model Workplace Savings 2.0. When we look at the key provisions of the PPA, I think it is important to note that the most critical plan design elements that the new law endorsed were already legal. In fact, they were being used in many existing plans even before the law passed.

The First Generation: Workplace Savings 1.0

From virtually a standing start in the early 1980s, 401(k)s and other defined contribution plans grew to enroll well over 62 million working Americans by 2006, roughly half of America’s total workforce. Over that time, defined contribution plans accumulated a total of over $4.2 trillion. The workplace system had also begun “rolling” multiple billions of dollars into Individual Retirement Accounts and become the largest source of IRA flows.

Social Security’s Declining Replacement Rates

Under current law, Social Security’s capacity to replace preretirement income is actually programmed to decline from nearly 39% to just over 29% by 2030. This is due to increases in the age of eligibility and to rising costs for Medicare benefits that will be deducted from future Social Security payments.

The simple fact is that the system’s replacement capacity is dropping. And at the same time, traditional defined benefit pension plans are dwindling to cover only a small minority of future retirees.