The retirement services industry knows its business. It designs, markets and administers retirement savings plans for a fee. In designing and marketing these plans the industry ignores the economic, social and cultural issues that make them inappropriate for low wage workers. This is especially true of 401(k) style plans because they require consistent and increasing contributions that are subject to loss.
Asking low wage workers to risk losing money to save for retirement is not only stupid, it's cruel.
And it's not just low wages that make 401(k) plans inappropriate for poor workers, many of these workers encounter social and cultural issues that make voluntary saving difficult. They often have to provide financial help to family members, while meeting their own day-to-day needs. As author Mel Jones points out in her excellent article in washingtonmonthly.com, The Second Racial Wealth Gap, this is especially true for black and Hispanic workers.
A 401(k) Plan Alternative For Low Wage Workers
The new state and federal based Individual Retirement Account (IRA) programs are an option for workers whose primary obstacles to saving are accessibility, ease of use and risk aversion. However, these plans don't address the issues of not having enough to save and dealing with family financial obligations. These workers need a government program that deducts money from their paychecks and diverts it to a guaranteed retirement income plan. A plan that also offers advantageous tax benefits that wealthier workers enjoy from participating in 401(k) style plans.
The great thing about coming up with alternatives to the 401(k) plan is that we already have models in the form of Social Security (SS) and the Retirement Savings Contribution Credit (SAVER's) credit. So instead of state run IRAs, we could have state run defined contribution plans modeled after Social Security, not traditional pensions. We can call them, State Retirement Plans For Low Wage Workers or SERPLOWs.
Funding SERPLOWs: Continue Reading...
I am a huge proponent of promoting the importance of saving for retirement. But I’m nothing like the austere champions of saving that berate the public for not saving, actually investing, enough or at all. Or who label them financially illiterate because the concept of compound interest won’t sink in. I understand why saving for a distant life is a hard message to hear for many people. I also understand why people fear investing as a way to save for retirement.
Aside from being deliberately confusing, investing is risky. This risk is so often downplayed by the usual responses of:
- think long-term
- focus on your goals
- you only lose if you sell
- focus on monthly income
- don’t focus on the accumulated amount
I know a lot of financial types will have an appropriate industry response about how she could recover her losses by keeping some of her money in the market because she didn’t need it all at once. But these folks miss the point. That 25% loss was a huge number. A psychologically unforgettable number… So huge that it made me rethink my sunny “but it’s for the long-term” response I am always quick to give to reluctant retirement investment plan participants.
And now with the financial markets having a lackluster 2015 and a horrible five trading days in a row, my friend’s story is fresh in my mind because I’m six years older. Six years Continue Reading...
There are many things that distinguish a defined benefit pension plan from a defined contribution savings plan. The differences were there from the start. Basically, defined benefit pension plans were designed to provide regular cash payments at retirement. Defined contribution plans are investment-based savings plan with no guarantee of lifetime income or any income at all. But despite the very different original intentions of these plans (retirement income versus investment savings), today they largely serve the same purpose. They are the two most commonly provided workplace retirement plans.
Total assets in defined contribution savings plans like the 401(k) plan haven’t yet overtaken those in defined benefit plans. However, defined contribution plans are the most prevalent workplace retirement plan in the private sector. And as the popularity of the 401(k) plan increases, so does its basic structure. For several years now these plans have adopted some of the same mechanisms as defined benefit pension plan. These mechanisms include automatically enrolling participants in the plan and choosing their investment funds. A quick look at today’s large company 401(k) plans (companies most likely to offer them), and automatic features abound. The average large employer 401(k) plan today has automatic enrollment, automatic escalation, and target date funds.
These automated features allow employers to choose when an employee enrolls and the amount of money he or she puts in the plan (automatic enrollment), as well as the fund(s) in which to place their money (default investment, increasingly a target date fund). It also allows the employer to increase the amount of money the employee puts in over time (automatic escalation).
What’s Up With That?
Could it be that employers and their hired retirement plan administrators are conceding that 401(k) plans are too complicated for workers to manage on their own? Continue Reading...
Almost all the articles lamenting the sad state of retirement savings in America focus on the averages. The average annual income of savers… The average retirement account balance… The average retirement account balance by gender, age, income level... Not surprisingly, the solutions they propose to solve the “retirement savings crisis” are for the average person.
The advice typically goes something like this:
- Create a budget or savings plan
- Save more, spend less
- Participate in your workplace retirement plan
- Contribute enough to get the full employer match
- Increase your savings overtime
- Saving all or part of their tax refund or annual bonus
- Claim tax breaks when they do save for retirement (e.g., SAVER’s tax credit)
- Delay retirement
- Delay claiming Social Security benefits
- Pay attention to plan fees
More Money And A Better Retirement Plan Continue Reading...
There are many likable features of workplace defined contribution retirement plans like the 401(k) plan. Employees can take the plan with them when they leave their employer. They can make their own investment choices. And they can enjoy the benefits of market highs. But as the 2008 Great Recession highlighted these plans have many negative components. However these negative features are accepted because most workers will never experience an alternative.
According to the Small Business Administration (SBA), more than 70% of small businesses do not offer a workplace retirement plan to workers. Of those that do offer a plan, 75% of workers participate in a 401(k) style plan. On the other hand, nearly all large firms sponsor a retirement plan. And like small firms, the plans they offer are mostly 401(k) style plans. As reported in a recent Towers Watson survey, only 7% of large firms offer traditional defined benefit pension plans to new hires. Consequently, there is a generation of workers who will never have an opportunity to participate in a traditional pension plan. The 401(k) plan is increasingly their only option.
But it is not just retirement plan options that employers are narrowing. Workplace health insurance options are decreasing as well. Even while employers are exploring private exchanges to give employees more health plan choices, these plans are usually high deductible health plans (HDHPs). And like 401(k) style retirement plans, HDHPs have some attractive features and some negative features.
The Future May Not Be So Bright
The negative aspects of 401(k) style retirement plans include high fees Continue Reading...
I have a confession to make. After years and years of discussing retirement plan features with new and old employees, I never once spoke of plan fees. Not during new hire benefits orientations, one-on-one information sessions, or group training sessions. I never even had a conversation about retirement plan fees with an employee benefit colleague, my supervisor, or the Chief Financial Officer (CFO). I did once have a conversation over dinner about plan fees with a third party administrator trying to get our company's business.
I'm making this confession because it wasn't until a few years ago that I realized the poor service I was providing in this area to employees. I considered fees in my own portfolio but I never once in my career thought of incorporating fee information into my discussions with employees. But all of that changed when the U.S. Department of Labor (DOL) passed regulation 408(b)(2) mandating annual fee disclosure notices for employees participating in workplace 401(k)-style retirement plans. And now retirement plan fees are all I want to talk about. For me, it is the biggest game-changer in workplace retirement plan administration and education.
What is Fee Disclosure?
DOL Regulation 408(b)(2) amends the Employee Retirement Income Security Act (ERISA) of 1974. It requires covered service providers (e.g., third party administrators and their subcontractors) to retirement plans to reveal information about their compensation. The goal is to help plan sponsors (e.g., employers) determine if the compensation is reasonable and identify potential conflicts of interest. The regulation went into effect on July 2012. Continue Reading...
The U.S. federal government administers two of the largest retirement plans in the country, Social Security (SS) and the Thrift Savings Plan (TSP). Social Security is available to all eligible workers and the TSP is available to federal workers and those in the uniformed services. Social Security is similar to a non-government defined benefit pension plan. Eligibility is based on years worked and wages earned, and benefits last a lifetime. The TSP plan is similar to 401(k)-style retirement plans where the employee contributes part of their pay to the plan and chooses a fund or funds to contribute to, and benefits are not guaranteed.
Given the federal government’s experience with large, complex retirement plans and the significant benefits they provide, benefit professionals may want to listen when the government suggests changes in this area. And it is not just the federal government proposing changes to workplace retirement plans, at least ten states are looking to expand access to a retirement savings account to workers without one. Unfortunately, these proposals rarely receive support or endorsement by benefit professionals.
This is odd. Benefit professionals are dedicated to helping employees minimize financial risk through insurance and savings accounts. So why are they not in support of efforts to expand access to these products?
Reasons Benefit Professionals Do Not Support Changes to Workplace Retirement Plans
We Americans love our celebrations, holidays, and observances. In fact, an entire publication, Chase's Calendar of Events Annual, is devoted to listing and explaining them all. For example, today, April 12 is National Drop Everything and Read Day. This is a good day to observe. But I have another day, week, no month I want to observe--National Stop Shaming Americans' Lack of Retirement Readiness Month.
Seriously, if you set up a Google Alert for Retirement Readiness, and I did, you will receive dozens of links in your inbox daily. Of course folks in the financial services industry write many of these articles. But academics and behavioral economists write some. All coming to the same conclusion: overall, Americans need to save more for retirement. Enough with the surveys and the self-serving commentary. How about writing about how retirement readiness can be greatly improved if:
- Employers who sponsor 401(k)-style retirement plans are required to make matching or profit sharing contributions unless they can show it will result in financial hardship