A cross-section of retirement industry officials gathered in Washington on Friday to re-ignite the discussion about how to fix the nation’s retirement system, saying the level of Americans’ retirement savings remains dangerously low.
At an event titled “Rethinking Retirement: Moving Ahead Without Leaving Anyone Behind,” sponsored jointly by AARP and the U.S. Chamber of Commerce and held at the National Press Club in Washington, retirement planning officials revealed some stark statistics about the nation’s lack of retirement readiness. They also offered ways forward on how to address the shortcomings and noted some key measures that are working.
A sampling of some alarming retirement statistics revealed at the event:
- 4 out of 10 older Americans have nothing set aside for their retirement
- A $6.6 trillion retirement savings gap has opened up between what people have saved versus what they need to save
- 53% of Hispanic seniors depend solely on Social Security for their retirement income
Keynote speaker Bob Reynolds (left), president and CEO of Putnam Investments, said that “first and foremost, the only real solution to America’s retirement savings challenge lies in payroll deduction plans at the workplace.” Jamie Kalamarides, president of Prudential Retirement, a panelist at the event, agreed that “saving at the workplace is the most effective way to prepare for retirement.”
'Staggering' Differences in Retirement Readiness
Reynolds noted the “staggering” difference in retirement readiness for those workers who have access to a workplace savings plan and those who don’t. Putnam’s lifetime income research, he said, shows that at the median, Americans who have no savings plans on the job are on track to replace just 41% of their work-life incomes once they retire, and that’s including Social Security.
On the other hand, Americans who do have access to savings plans at work are on track to replace 73% of their pre-retirement incomes, he said.
Even more impressive, he continued, is that workers who are active in defined contribution plans are on track to replace 79% of their work-life income. Those who are automatically enrolled in their plans are doing “even better,” Reynolds stressed, tracking toward 91% income replacement, while those who are enrolled in auto-escalation are headed to 95% replacement rates.
The gathering came as tax incentives for retirement saving plans have come under the microscope in Washington. Senate Finance Committee leaders recently announced that after three years of working on bipartisan tax reform they were restarting the debate with a "blank slate" that would throw out tax incentives, including retirement incentives, in the Internal Revenue Code that represents permanent lost revenue to the Treasury.
Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee along with Sen. Orrin Hatch, R-Utah, ranking member on the committee, said that the blank slate approach, "which is not the end product nor the end of the discussion," would help ensure “that we end up with a simpler, more efficient and fairer tax code... a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as ‘tax expenditures.'"
A Call to Help for Lower-Income Workers
However, AARP and the Chamber of Commerce issued a joint call to action not only on the need to expand access for workers to tax-deferred payroll deduction retirement plans in their workplaces, but also to minimize the cost and administrative burdens on employers, increase education about the need to save for retirement and enhance tax incentives for low- and moderate-income workers to save.
As Leticia Miranda of the National Council of La Raza noted at the event, the current retirement tax incentives are “skewed toward higher-income workers.” Other speakers pointed out that not every worker—mainly those with low and moderate incomes—and those working for small businesses has access to a workplace retirement plan.
Miranda noted that two-thirds of Hispanics work for employers that don’t offer a retirement plan. “The private retirement system has to be changed to include low- and moderate-income workers,” she said.
Indeed, several of the retirement planning speakers noted the importance of the Pension Protection Act (PPA) of 2006, and the best practices that it put in place, including auto enrollment, auto escalation and guidance on qualified default investments.
Beth McHugh, vice president of Workplace Investing at Fidelity Investments, noted that post PPA, plans that now include auto enrollment have an 83% participation rate compare to a 53% rate for plans without an auto enrollment option.
“It wasn’t until PPA that Congress and regulators formally recognized that 401(k) plans had, in fact, become the primary source for Americans’ future retirement income,” Putnam's Reynolds said. “PPA marked a qualitative change, one that has already begun to transform all workplace savings for the better.”
Post-PPA, he continued, “the wave of change among 401(k) plans across corporate America has begun to create something resembling a true national retirement system--though the build-out is far from finished.”
The best practices endorsed by PPA, Reynolds said, should be "the new norm for all workplace savings plans."
"Let’s go 'full-auto,'" Reynold said: auto-enrollment, auto-re-enrollment annually, auto escalation to higher deferrals, plus automatic default to qualified target date or balanced funds.
Expanding access to workplace retirement plans can also be accomplished through the auto-IRA concept or proposals for simplified 401(k)s, Reynolds continued, which "would actually be quite inexpensive for companies to implement." However, he noted, the auto IRA has been stymied politically because it's considered a mandate.
Some other next steps that are needed to address retirement readiness issues include simplicity of plan design, as noted by Heather Hooper of Loring Ward, and expanding coverage to small businesses through multiple employer plans, Kalamarides noted.
Kalamarides noted that every single retirement bill which has been a bipartisan effort includes language on how to boost the use of multiple employer plans. That suggests that “this seems to be the Congress” that will pass multi-employer plans legislation, he said.
Read 3 Steps to Shore Up Retirement Security: Putnam CEO Bob Reynolds at ThinkAdvisor.