CRR Makes Recommendations for Improving Retirement System

In a letter to the Department of Labor, researchers for the Center of Retirement Research at Boston College make policy recommendations to address defined contribution plan portability and access, among other things.

The current defined contribution retirement (DC) plan system could be improved along three dimensions, according to researchers from the Center for Retirement Research (CRR) at Boston College.

In a report prepared for the Department of Labor, “An Analysis of Retirement Models to Improve Portability and Coverage,” Dr. Alicia H. Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management and director of the CRR; Anek Belbase, research fellow; and Dr. Geoffrey T. Sanzenbacher, research economist at the CRR, say the first dimension is to minimize procedural barriers to moving money between employer plans in order to reduce the number of small and lost accounts. The second is the effect of transfers from the workplace system to the adviser-oriented retail component (such as individual retirement accounts (IRAs)), and the third is leakage from both workplace plans and IRAs, which the researchers say tends to cut balances at retirement by about 25% on average.

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To enhance portability, the researchers suggest requiring DC plans to accept rollovers; standardizing rollover rules and paperwork; encouraging direct rollovers; setting up a public registry to prevent lost accounts; and creating a clearinghouse to automatically roll over small balances. To protect transfers from workplace accounts to and IRA, the researchers recommend limiting forced transfers and expand their investment options; reducing conflicts of interest through a fiduciary rule; and enhancing the transparency of fees. Finally, to reduce leakage from DC plan accounts, they suggest limiting or prohibiting cashouts at job termination; tightening hardship withdrawal criteria; and coordinating the age for penalty-free withdrawals with Social Security claiming provisions.

The researchers also note in the report that, “The percentage of workers covered [in an employer-sponsored plan] has not improved since the late 1970s.” They attribute this to two factors: Many employers—particularly small employers—do not offer a retirement plan, and the uncovered employees who work for an employer with a plan either choose not to participate, often through inertia, or are not eligible because they have not worked for the employer long enough, work too few hours, or are in a type of job that is not covered by the plan. “As a result, increasing coverage will require both expanding access to employer-based plans and increasing participation in existing plans,” the researchers say.

They note that federal and state initiatives have been aimed at increasing coverage for traditional workers, such efforts to reduce barriers to adopting plans and laws that require employers to provide access to a plan. Efforts to expand coverage by moving away from the voluntary model and imposing a mandate on employers have been effective in other countries such as the United Kingdom; and even within the voluntary system, DC plans that automatically enroll workers—with the ability to opt out—has improved participation rates, the researchers note, adding that proposals in the U.S. to automatically enroll workers in an IRA have not been adopted at the federal level, but several states are moving forward with these auto-IRAs.

To improve participation for workers eligible for an employer DC plans, the researchers suggest mandating that these plan automatically enroll new employees immediately and non-participating employees periodically. To enhance the voluntary DC plan system, they recommend publicizing the availability of federal plans designed for small business (SEP IRAs, SIMPLE plans); expanding state-run programs like those in New Jersey and Washington if they prove successful; enacting legislation to facilitate the establishment of open multiple employer plans (MEPs); and expanding the Saver’s Tax Credit.

The researchers also advocate for mandating employers to establish plans with auto-enrollment for employees without coverage and mandating employers to contribute to a retirement plan on behalf of their employees, as in Australia.

Not to leave out the self-employed and the growing number of contingent (gig) workers, the report also proposes that policymakers require individuals to contribute a percentage of earnings to a retirement savings vehicle and encourage innovative efforts to bring retirement plans to contingent workers.

Advisers Continue to Select ETFs as Preferred Investment Vehicle

The vehicle has maintained the popularity vote since 2010.

Exchange-traded funds (ETFs) are continuing their momentum of popularity as the tool wins its fourth consecutive year as the top investment vehicle among advisers, a new survey by the Financial Planning Association (FPA), the Journal or Financial Planning, and FPA Research and Practice Institute reveals.

According to the FPA, 87% of advisers are currently using or recommending ETFs to their clients, out of 20 investment vehicle options listed in the survey. Additionally, 46% of advisers plan to expand their recommendation of ETFs in the upcoming 12 months.

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Usage of ETFs has risen over the past eight years, says the FPA, with % of survey respondents utilizing and recommending the vehicle back in 2008, compared to 72% in 2018.

Following the popularity behind ETFs, the survey found blends of active and passive management styles are also preferred by advisers, with 65% of survey respondents voting in favor of them. While a consistent trend over the past five years, the survey says advisers are showing a higher preference towards purely passive approaches, as 22% voted for the style in 2018—an increase from 15% in 2017.

“With only 200 active ETFs out a universe of nearly 5,000, the continued rise in advisers’ use of this investment vehicle is clearly congruent with the uptick in their adoption of a purely passive approach to investing,” says Dave Yeske, managing director of Yeske Buie and practitioner editor of the Journal of Financial Planning. “And while 65% of advisers continue to favor a blend of active and passive approaches, these results suggest that the ratio may be shifting in favor of passive.”

Other preferred investment options include cash and equivalents, as 83% of advisers voted usage and recommendation of the product in 2018. Twenty-four percent also say they plan to increase their use/recommendation of these vehicles over the next 12 months.

Yet, aside from ETFs, no other investment vehicles ranked as highly in favor, reports the FPA. Only 19% of respondents plan to raise their use of mutual funds, and 19% plan to grow their individual stock-use.

Among the least-utilized investment vehicles are cryptocurrencies, as only 1% of advisers currently operate or recommend the investment type. According to the survey, only 2% believe they are a “viable investment option that has a place in a portfolio,”; 24% see cryptocurrencies as a “gamble” and “only worth investing money you can stand to lose,”; 29% think the investment is an “interesting concept to keep an eye on, but not invest in yet,”; 18% voted it is a “fad that is best avoided,”; and 26% consider them as “not a viable investment option.” Unsurprisingly, the FPA says usage is not likely to increase, as only 2% report they will raise usage/recommendation of cryptocurrencies over the coming 12 months.

The report surveyed 78% of Certified Financial Planner (CFPs) professionals, with 55% indicating they work as independent IARs/RIAs. More information on the study can be found here.

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