The time has come for employers to make mandatory
contributions to defined contribution plans. Please do not shoot the messenger:
We need to address this reality in order to achieve the retirement outcomes
needed for Americans.
Farewell, Pension Plans
As a country, we have effectively eliminated defined benefit
pension plans. According to CNN Money, the percentage of workers in the private
sector whose only retirement account is a defined benefit pension plan is now
4%, down from 60% in the early 1980s. About 14% of companies offer a
combination of both defined benefit pension plans and defined contribution
retirement plans.
At the same time, Fidelity Investments recently reported
that the average 401(k) balance reached a record $130,700 in the fourth quarter
2021.
While this is a wonderful result, this amount will not
provide enough supplemental retirement income to maintain employee lifestyles
when employees stop working, after taking into consideration increased living
costs and projected life expectancies.
Lastly, on a global basis the United States’ existing
retirement laws, regulations and structures are producing outcomes that rank
well down the major country rankings.
Realizing that change is needed, our legislators at the
federal and state level continue to look for ways to reform our defined
contribution-focused retirement system and increase projected future savings by
expanding access to retirement plans and allowing lifetime income products to
be part of plans.
While these efforts are laudable, they do not go far enough.
In my view the proposed changes will not translate into
accumulating the amount of needed assets to generate satisfactory retirement
outcomes for households.
We will likely fall short as increasing access or adding
income options does not necessarily equate to actually having cash in
retirement accounts when full-time work ends.
What is needed is to mandate having defined contribution
plans in place for all workers – both part-time and full-time – and requiring
minimum corporate retirement contributions.
At the same time there needs to be an effort to encourage
American business to making satisfactory retirement outcomes a key part of
compensation planning
Let’s explore why these mandates are needed.
Today’s Environment
Here are some thoughts on the environment we face today and
for the near future:
1. The Defined Contribution Plan Shift
Over the last several decades through legislation and
regulation we have moved the responsibility for retirement saving from
corporations to individuals.
We have put households, already dealing with the high costs
of living including energy, health care, education and housing, in charge of
saving enough to provide future incomes that will allow them to have reasonable
lifestyles in later life.
At the same time wages have not increased sufficiently to
compensate for the increase in living costs.
The result of this squeeze is that households have not been
able to accumulate sufficient savings and benefits to secure their non-working
years.
2. Lack of Savings
Due to low levels of savings and resources, more and more
Americans will likely depend on Social Security retirement benefits as their
primary income source to pay living expenses when full-time work stops.
As we know, Social Security was only designed to replace
about 40% of the average worker’s compensation prior to retiring. Relying on
Social Security as the primary income source will not result in satisfactory
lifestyles in retirement.
3. Lack of Social Security Assets
The financial status of Social Security needs reform to be
sustainable for current and future beneficiaries. This effort will likely put
additional pressure on the federal government and workers to contribute more.
4. No Way Back
As we have demonstrated in the past few decades, mandating
defined benefit plans for all workers is not feasible from a financial and
accounting standpoint for businesses.
5. COVID-19
Post pandemic, we have seen that American business needs
qualified workers. Recruiting and retaining qualified workers is essential for
business success today and in the future. Enhanced retirement savings offerings
could lead to attracting the needed workers.
The Idea
Given that we already have a full defined contribution
infrastructure in place we should find a way to use it better.
It has all the major regulations, years of business use and
worker familiarity that come from the program being in place since 1978.0
One efficient way to make better use of the defined
contribution plan infrastructure would be to mandate that all employers have
defined contribution plans in place and contribute a minimum amount towards
each employee’s (full and part-time) retirement.
We could mandate a minimum contribution of at least 2% of
salary and allow for matching of employee contributions above this amount. We
could also mandate the vesting methodology for these contributions.
This new effort could be subject to the contribution
maximums already in place.
A Stark Reality
As a country, we need to take serious action to improve
retirement outcomes for our citizens.
Workers just don’t have the capacity to save more for the
future, and for the lengthening life expectancies many of us will be lucky
enough to experience.
There needs to be a larger inflow of savings dollars into
retirement plans.
Again, please don’t shoot the messenger, but this funding
should come from corporations. It is the stark reality we are facing.
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