Reports that retirement savings increased during the
COVID-19 pandemic do not tell the whole story. Many Americans lost their
jobs—and their benefits—and some had to dip into their retirement accounts to
make ends meet.
Ed Farrington, head of retirement and institutional
investing at Natixis Investment Managers, says the effect the COVID-19 pandemic
has had on retirement savings has highlighted the issue of income inequality in
the U.S.
“The U.S. scores very high in per capita income but is in
the bottom 10 of the list of countries when it comes to income equality. This
topic shines a light on that,” he says. “Those who were able to continue with
their jobs and had a workplace retirement plan were able to continue contributing
to retirement savings and were less likely to have to withdraw from their
accounts. And, with the market doing well last year, they benefited. It further
exacerbates the gaps between the haves and have-nots.”
Farrington says the retirement planning industry has a voice
in the matter. “The system relies heavily on participation in a retirement
plan, which corporations and policymakers have a hand in,” he says. “There are
things we can do to give people the best possible chance to have income they can
rely on in retirement.”
Farrington say the No. 1 priority is to make workplace
savings plans more readily available. The establishment of state-run retirement
plans and pooled employer plans (PEPs) is a start, he says. While distributions
and loans from retirement plans are generally discouraged, they were a lifeline
for some participants during the pandemic; those without a plan didn’t have
those options available.
Another important piece of addressing inequality is for plan
sponsors, to the extent that they are capable, to offer a matching contribution
on employee deferrals. “We know the match is of tremendous value for employees
and a tremendous incentive to save,” Farrington says.
Another incentive for people to save is the tax-deferred
nature of retirement plans. “We should make sure we defend that,” Farrington
says. “If the ability to contribute to plans on a tax-deferred basis is
removed, it might offer the government a short-term benefit to budget
reconciliation but it could have a long-term negative effect on retirement
savings.”
Farrington says employers should offer a holistic benefits
package to help with income disparity. “It’s important to provide employees not
just with a health care plan, but also education about health care in general.
Health care is where people spend the most money out of pocket in retirement,
so plan sponsors can help them take steps now to mitigate that risk,” he says.
Natixis asked retirement plan participants to choose between
30% less in income and a holistic benefits package, or no benefits and 30% more
income, and the majority (70%) chose less income and holistic benefits. “So we
can see employees are looking to the workplace to help them have a better
quality of life,” Farrington says.
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