Success Is Not Enough

John Iekel 

The U.S. retirement system is a success—but we still can do better. That was the message from an expert panel that recently examined the gaps in that system and made suggestions regarding how to fill them. 

Pete Swisher, Managing Partner at Group Plan Systems, and Annie Messer, President, Member Relations at Pension Resource Institute and Group Plan Systems, offered their insights during the January 9 Broadridge Webinar, “Six Gaps in the U.S. Retirement System (and How to Close Them!)”

“The U.S. retirement system is the one of the most successful on the planet,” remarked Swisher. He singled out the 401(k) as “an incredible success,” while in many countries it’s “defined benefit of nothing.” There are some other countries, however, that also have defined contribution-style systems, he said, such as Chile. He added that a coverage mandate “has increased coverage substantially” in the United Kingdom, while Australia employs superannuation.

“We can and must do better,” countered Messer, asserting that “policy alone won’t get it done.” And she warned, “Without changes, retirement will not be feasible for a large percentage of the population.” 

Participation

Messer said that 70% of workers have access to a retirement plan, but not all of those who do have access participate—she said that 75% do. She added that because a “significant percentage” of employers don’t provide coverage, governments are stepping in. 

Savings 

The savings gap is “much harder to solve for,” said Messer. And poor savings, she said, in turn lead to lifetime income gaps. 

Messer suggested that creating incentives could help. She also argued that automation can help increase savings. “‘Out of sight, out of mind’ goes a long way in increasing savings,” she said. 

Swisher argued that mandates could help as well. “Mandates work,” he said, adding that in his view, absent a mandate, “we’re probably going to have lower success.” But he said that that there is “no appetite” for a federal mandate to increase savings, and that the government prefers to leave it to the states. And Messer acknowledged that state mandates “have helped” but cautioned that the low contribution limits common to those programs affect their effectiveness in closing the savings gap. 

Messer also suggested lifetime income solutions. “There is a lot of buzz about in-plan retirement plan solutions” that would build lifetime income, she said. But not all employers are among those who are enthusiastic about them, she said. The factors she identified that keep them from offering guaranteed in-plan solutions include: 

• cost;
• administrative complexity;
• participants using retirement products that are inappropriate to their particular situation; and 
• portability, which she says has “improved over the years, but still is not quite there.” 

Governance 

Swisher said expectations regarding how plans are run are high. He said that 100% of fiduciaries are expected to know 100% of the duties and the prudent process for meeting them, but that he thinks “it’s a stretch to expect them to grasp all the requirements to be filled in that function.

And problems in that regard are widespread, he continued, saying that 99% of plans have operational defects, which most audits uncover. 

Options 

Messer and Swisher discussed a variety of policy options for improving retirement plan coverage and participation.

Starter 401(k)s. Messer said that they can help, but that like state-mandated programs, their effectiveness can be hobbled by low contribution limits. 

Auto Features. The provision in the SECURE 2.0 Act concerning autoenrollment, Messer said, “will no doubt help move the needle.” Still, Swisher suggested that one should “be aware of auto enrollment mandates” and observed that auto enrollment is especially difficult for some employers, such as those in industries in which there is a high employee turnover rate. 

Swisher added that automated systems can help build generational wealth, something that would help reduce savings gaps. 

LTPT. Long-term, part-time employee arrangements may increase participation, Messer said, but not in the way one may expect. She thinks that plans will make adjustments to avoid LTPT arrangements, and, in the process, “inadvertently increase participation and savings for a larger percentage of employees.” 

Emergency Savings. Emergency savings vehicles will help employees start saving for retirement, Messer said. 

Start-up Plans. Such plans are “extremely effective in closing gaps,” Swisher said, but for them to have a bigger effect, more people need to sell them, as well as advocate for the right plan design and connect with participants. 
Messer indicated that start-up plans may not be a panacea, observing that she has heard objections to them concerning the costs and amount of time they entail. 

PEPs. Messer gave highest marks to pooled employer plans in improving coverage and increasing participation and savings, calling them “the best solution we’ve seen” in mitigating the savings gap. 

A Hopeful Note

Despite the gaps, Swisher nonetheless expressed hope. “The will of this country to close the coverage gap is growing,” he said, adding that it is expected that 200,000 employers will enter the retirement system soon.