For Rosier Picture, Add Complete Stats

The defined contribution (DC) system is in much better shape than the headlines that blare, “The U.S. retirement system is a failure,” says Carrington, Franklin Templeton’s head of defined contribution, investment only (DCIO) institutional. 

Average balance statistics in 401(k) plans are among Carrington’s least favorite. “It’s completely meaningless,” he tells PLANADVISER. As an employee who has been with his current firm for eight months, he points out, his own 401(k) balance at Franklin Templeton, given his age, would make it look as though he is headed for utter retirement failure.

“You have to be much more nuanced about the data,” Carrington says. Average balances or average retirement wealth must be calculated using multiple accounts. “You have to subdivide further by age, and frankly you have to subdivide by income,” he says.

The worker who lives in Nebraska and makes $30,000 a year does not, in fact, need a million dollars to fund retirement—Social Security is going to cover a significant part of retirement, which is the way the U.S. system is built. Modest balances are sufficient to help some achieve a full-income replacement ratio.

It’s all too easy to distort numbers in headlines, Carrington says. He takes issue with statistics on retirement plan coverage that indicate just half of Americans have access to a plan. News about retirement statistics should talk about multiple accounts, multiple careers and the percentage of Americans who are actually on track, when Social Security is factored in, to replace a dignified sustainable retirement number.

“And then what can we do to improve those numbers?” Carrington asks, emphasizing that he is not saying the system is in perfect shape. “Talking about average balances, or misleading survey data about coverage is not only not helpful or educational, but it actually leads to harmful discussions, and harmful potential policy solutions.” See “Retirement Readiness Not Accurately Gauged.”  

As an example, Carrington discusses California’s statewide proposal to cover workers who lack an employer-sponsored plan (see “Bridging the Retirement Savings Gap”). He feels it needs more deliberation. The picture is simply not as simple as imagining a substantial number of people who have no retirement coverage and never will. If you were to draw a Venn diagram of people in California with a full-time job but no access to a plan, he says, some portion of that group will never have retirement coverage. Another subset of people would have had a plan with a previous employer. Another subset are young workers who haven’t had a plan in the past but likely will in the future.

“Imagine that Venn diagram, moving through time,” Carrington says. Now it is no longer a snapshot of who lacks coverage today, but a picture of workers who don’t have coverage over the course of five or ten years. The whole circle is larger, but the number of people who never had coverage and never will is smaller.

The pool of workers who lack coverage needs deeper analysis, Carrington feels, since some may be people who worked for a big, Silicon Valley tech firm and now are with a startup. But the state proposal mentions people who have never invested in the market, and is building the system as if it’s a savings account for people who fear volatility.

“Who are you trying to serve?” he asks. “All people who currently don’t have coverage? Or this small subset? A system designed to serve this small subset won’t serve the larger proportion of the population.” Relying on headline statistics and assuming a permanent have-not group could lead to a solution that may not be adequate for the coverage problem, according to Carrington.

Carrington also considers job mobility as a factor in seemingly low participant retirement account balances. “It’s not a permanent have, have-not problem,” he says. Imagine someone who works for an independent local restaurant and has no access to a workplace retirement plan. Then they get a job with a national restaurant chain and begin participating in a plan. They may spend some years going back and forth between the two types of employment. Bridging coverage gaps is the goal—not seizing on the individual as someone who completely lacks coverage.

It is a mistake to take a snapshot of plan access, or balance amount, or coverage levels, or balances for near-retirees and question retirement savings adequacy. “You don’t know enough to answer that question,” Carrington says. The snapshot does not delve into other assets, or access to a defined benefit (DB) plan, or whether Social Security can cover a sizeable portion of the individual’s retirement.

Carrington is impatient with scaremongering headlines about Social Security going bankrupt. “You hear about surveys that say there won’t be any money for Social Security,” he says. “It’s a terrible misreading of the data. If we managed to be so incompetent as a nation that we didn’t do anything at all to Social Security until the trust fund runs out in—what, 2030—we’ll still be paying Social Security taxes.” The amount of money coming in from people’s paychecks will still cover some 70% of benefits, Carrington says. “It’s a big cut, but it’s not zero,” he says.

The U.S. has some important tasks to strengthen retirement, Carrington says. “We shouldn’t ignore the coverage gap,” he says. “I’m not saying there aren’t things we need to do.” But he draws the line at alarmist discussions that lead to thinking the system is a total failure and needs to be restarted from scratch.

The broader media is not focusing enough on the industry’s success, but Carrington admits it is not as interesting a story to talk about the need for nuanced statistics. Auto enrollment, auto escalation and default investing have dramatically raised participation rates, he says. After the first wave of getting people into retirement plans, plan sponsors, advisers and recordkeepers are now beginning to think of ways to raise savings rates.

When the industry looks back on this period, Carrington says the question he will ask is, “Did we do all we could to make it better?”