Retirement Witnesses Share What Works

At a hearing before the Senate Committee on Health, Education, Labor and Pensions (HELP), Edward Moslander, senior managing director for institutional relationship management at TIAA-CREF, noted that the traditional “three-legged stool,”—defined benefit (DB) pension plans, Social Security, and personal savings acquired through defined contribution (DC) plans—has become increasingly unsteady.

“Retirement has become much more of a ‘do-it-yourself’ proposition, where a large part of an individual’s retirement security depends on defined contribution plans,” Moslander said.  

Moslander pointed out that many eligible workers still do not participate in their DC plans, and those that do often have a difficult time saving the 10% to 15% of their annual income that most financial experts agree is necessary to achieve a secure retirement.“For this reason, it is extremely important that employers recognize that attaining retirement savings goals is a shared responsibility between employers and employees,” he stated.

Moslander suggested employers offer matching contributions that encourage employees to contribute, such as a dollar-for-dollar match when an employee saves up to a certain percentage of his or her salary.“In addition to providing a tangible incentive to contribute, matching contributions demonstrate to employees that their employer values saving for retirement and cares about their employees’ financial future,” he said.  

Moslander added that workers often have to make complex decisions about how much they should be saving and how to invest these savings; however, the lack of financial literacy across the nation often means that most are not equipped for these tasks. He said TIAA-CREF believes it is important to offer clients tools that can assist them with making these decisions, including user-friendly online programs, access to advisers either in person or over the phone, and comprehensive objective third-party advice programs.

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Finally, Moslander noted that while there has been much attention paid to the accumulation phase, there has been less of a focus on the draw-down phase, when people are spending the money they have saved for retirement. He said it is crucial that those who are saving for retirement receive information not just about their accumulations, but also about how that accumulation translates into income at retirement, as was proposed in the Lifetime Income Disclosure Act. “[W]e believe that retirement plan providers should take action now to institute this feature and not wait for policy makers to enact mandates,” he stated.  

Julia McCarthy, executive vice president at Fidelity Investments, noted that auto-enrollment has helped with the participation problem, but the default deferral rate for many plans is too low.Most plans use the safe harbor 3% default deferral rate. “Our experience is that participants who are auto-enrolled, regardless of the rate—3%, 6% or higher—are likely to take no additional action with regard to saving more for retirement. With opt-out rates virtually identical at each 3% and 6% respectively, steps should be taken to increase the default deferral rate to 6%,” she said.  

McCarthy added that annual increase programs are the single most effective driver of deferral increases at Fidelity. However, only 11% of plans offer automatic annual increase programs with the rest requiring participants to proactively enroll in an annual step increase. She suggested more can be done to incent plans to adopt auto-features.  

According to McCarthy, participants need help understanding a range of financial topics—from the most basic information about how to enroll in their plans and how much they should save to more complex topics such as proper asset allocation and retirement income planning.  “Our data shows participants who receive guidance take action and have better outcomes—increased participation, increased savings and improved asset allocation.  Policymakers should look to protect and promote the availability of education and guidance by service providers and recordkeepers,” she stated.  

M. Cindy Hounsell, president of Women’s Institute for a Secure Retirement, contended that the retirement savings issues are compounded for women—women live longer, often earn less, have uneven work histories due to caregiving responsibilities and a have a greater likelihood of working part-time where retirement benefits are not offered. She said there is increasing evidence that planning for retirement is effective and work place seminars are helpful, but there is a need for more basic resources to help people figure out how much they need to increase their savings by in order to retire with security.

According to Hounsell, several issues women are in particular need of learning about or better understanding, include: 

• Asset to income ratio and how much is needed for a secure retirement; 
• Longevity risk, which is poorly understood and not widely planned for; 
• Value of guaranteed lifetime income or how to draw down assets; 
• The impact of future inflation and taxes, and how to include them in retirement planning; and 
• Career duration: Many women assume they will just keep working beyond normal retirement age, but more than 40% of Americans end up retiring earlier than they planned to, usually due to job loss, family needs including health issues, or personal poor health. 

Brigitte Madrian, Aetna professor of Public Policy and Corporate Management at Harvard Kennedy School, added that DC plan participation is a much bigger problem in small firms, which are less likely to offer a retirement savings plan and, if they do, are much less likely to use automatic enrollment.   

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Policy initiatives that encourage and facilitate the automatic savings of employees in small firms are a key step to increasing participation and improving outcomes in a DC retirement savings system, she contended, pointing out that two such proposals are the Automatic IRA and the U.S. Senate HELP committee’s USA Retirement Funds. (See “Retirement Plan Would Be a Win-Win for Working Families, Employers.”) “Both would create a simple and low-cost mechanism for small employers to make contributions to retirement savings accounts for their employees through payroll deduction,” she said.  

Madrian also pointed out that DC plans are frequently tapped before retirement for other reasons. “This suggests that policy should either encourage contribution rates that are above those needed solely to fund retirement, or policy should limit the extent to which individuals can take pre-retirement distributions from these accounts,” she contended.  

Finally, Madrian said employers provide several valuable services to their employees when it comes to the investment options in their savings plans: They evaluate the many available alternatives and select the few options that are best suited to their employees’ needs, and they are able to offer employees lower-cost investment options than the employees would have access to individually through economies of scale. She suggested having employers perform the same function for retirement income options would be a valuable service to many current and former employees, but employers currently have little incentive to do so.  

A replay of the hearing, “Pension Saving: Are Workers Saving Enough for Retirement?” can be accessed at http://www.help.senate.gov/hearings/.