It’s On. Financial Services Firms Won’t Give Up Their Control Over Retirement Plans Without A Fight.
It is fair to say that before federal and state lawmakers started focusing on individual access to health insurance and retirement plans, the private sector was okay with maintaining the status quo. A system where if you worked for a large employer and were continuously employed, you could receive subsidized health insurance and have access to a convenient workplace retirement plan. And, the higher your income the more you benefitted from the tax-favored design of these plans.
Then along came the Affordable Care Act (aka Obamacare), bringing the lack of access to affordable health insurance for tens of millions to the top of the public policy agenda. Sensing an inevitable shift in the status quo, private sector health insurance companies and big pharmaceutical companies mobilized to protect their interest. Change to the status quo was fine with them as long as the status quo did not change. Additions to the status quo that left the existing system intact are okay. They lobbied hard to get everything they wanted and little or none of what they did not, and they succeeded.
Soon after, the federal and many state and local governments turned their focus to individual access to retirement savings plans. They found similar problems as with access to health insurance. The lower an individual’s income, the less hours they worked, and the smaller the company they worked for, the less likely they were to have access to a workplace retirement plan. To address the issue, lawmakers proposed their own plans. Some wanted to allow workers without workplace retirement plan access to federal or state retirement plans. But most elected to design new plans that had some but not all of the features of 401(k) style defined contribution plans. Now who would have a problem with this approach? The current system showed little or no interest in these workers. Surely, the financial services sector would not object to everyone having access to a workplace retirement plan. Well, some of them kinda do object.
We Don’t Need No New Plans
Large financial institutions were not completely supportive of the idea of adding “new” retirement plans. They felt like they already had products to meet everyone’s needs even if they did not market these products to the individuals policymakers were trying to help. When President Obama announced the creation of the MyRA (My Retirement Account), many financial service providers scoffed. They called and small potatoes and redundant.
Some suggested that the states might be able to do a better job at addressing the retirement plan access problem. And many states did and are still trying to do just that. But what most people don’t know is that the financial services industry is using its considerable wealth to make sure these laws don’t infringe on the good thing they have going—earning billions managing workplace retirement plans.
A recent article in Institutional Investor chronicled the difficulties of passing legislation to create retirement plan products for the millions without access to a workplace plan. It tells how lobbyists representing financial services firms make demands like eliminating automatic enrollment into the plans, preventing the pooling of assets, and limiting participation to employers of a certain size. In effect, limiting the effectiveness of these plans and access to them. Basically, the industry fears having its fees regulated as well as competing with public retirement plans.
Public Versus Private
Public policy experts and academics have different opinions about who should manage the country’s worker retirement plans. Well-known retirement plan expert, Teresa Ghilarducci, advocates for a pooled retirement fund administered by the government. She also proposes regulating 401(k) plans as a financial product. On the other side of the debate is a recent proposal, Building On What Works: A Proposal To Modernize Retirement Savings, by John Friedman of Brown University. He advocates for a universal retirement system managed by the financial services industry. Professor Brown believes they have the unique expertise to perform this tasks as opposed to employers or government.
Professor Brown’s proposal is worth a read, even if I do not agree with any of it except for the concept of a universal retirement savings account that is not tied to a specific employer or job.
I have nothing against the financial services industry. I support and appreciate the work that they do. However, there is just too much potential for conflict to leave them to their own devices or let them take the lead on the country’s retirement savings policies. They have a role to play, but it is a supporting role. We already have a lead actor in the universal retirement savings sphere—Social Security. Eliminating the cap on earnings subject to the Social Security tax would go a long way in keeping the program solvent and available to all.