Members of Generation X believe they will need to save at least $1 million before they can retire. Who can help them save it?
By Cyril Tuohy
Two prominent retirement public policy experts delivered a blistering rebuke of the defined contribution retirement system, even taking financial advisors to task for charging high fees and in some cases dispensing bad advice.
In testimony before a Senate panel earlier this month, Robert Hiltonsmith, an analyst with the research and policy consulting firm Demos, said many individual retirement account (IRA) brokers and 401(k) financial advisors take advantage of a lack of knowledge among employers and employees.
Savers lose an average of nearly 1 percent in returns due to poor choices by plan fiduciaries, “in part likely due to poor or conflicting advice received from their plan financial advisors,” Hiltonsmith told the senators.
Hiltonsmith spoke March 12 before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy.
The subject of Americans’ retirement preparedness has become a hot topic among lawmakers, as the financial crisis brought to light the precarious financial positions of tens of millions of Americans who saw their holdings vanish.
With the economy on the mend, lawmakers and the Obama administration have given serious thought to new ways to encourage millions of workers to secure a comfortable retirement for themselves, even as many workers have not saved enough.
Two bills, one sponsored by Democrats and another sponsored by Republicans, have been introduced in the Senate. Obama last month also launched the “myRA,” a simplified retirement account to get workers started on retirement saving.
Monique Morrissey, an economist with the Economic Policy Institute, said investment risks faced by individual investors are “often poorly understood even among supposed experts.”
She concurred with Hiltonsmith that the defined contribution system, originally sold to workers under the guise of “do-it-yourself” investing, has come up short – and that workers, not employers, have come out on the losing end.
Morrissey said the government should expand Social Security, preserve defined benefit pension plans, reform “upside-down tax subsidies” and adopt a model akin to the Thrift Savings Plan, the federal government’s equivalent to the 401(k) in the private sector, where options are limited and fees remain low.
A bill proposed by Sen. Tom Harkin, D-Iowa, and Rep. Linda Sanchez, D-Calif., would strengthen Social Security benefits by reforming the program’s benefit formulas and tweaking cost of living adjustments.
But is it really that clear cut? Has the defined contribution system short-changed employees as much as Hiltonsmith and Morrissey suggest?
Surveys find workers like many aspects of the defined contribution model, from its portability to the choices it offers to the unmatched convenience of the payroll deduction. Financial advisors are widely viewed as a net positive to investors.
Investors who go through life following a solid financial plan drawn up by advisors do better than investors that go without a plan.
Kristi Mitchem, executive vice president for State Street Global Advisors, which manages more than $305 billion in retirement plan assets, said that many employees working for large companies in particular, have done relatively well by their employer-sponsored retirement plans.
The real problem isn’t with the defined contribution system, she said. The challenge is with a “great divide” between employees at large employers who can set aside money for the future, and tens of millions of workers employed by small business, many of which don’t offer retirement plans to which workers can contribute in the first place.
“Large employers are much more likely to provide a retirement plan,” she said. “And when they do, the plan produces better results for those employees who participate in it.”
The government needs to remove obstacles toward plan sponsorship, she said. In addition, the retirement industry needs to find ways to help more small employers sponsor retirement plans, and enroll more employees once those plans are up and running.
Mitchem also called on the expansion of multiple-employer plans whereby several employers merge existing plans through an industry group or trade association. That allows employers to transfer the liabilities and fiduciary responsibilities.
Multiple-employer plans have been used for years by companies that share common payroll providers but new generations of “open” multiple-employer plans have sprung up recently, Terrance Power, president of American Pension Services, said in a blog posting.
Changing the laws to make it easier for small businesses to join multiple-employer plans would inspire the marketplace to create more retirement products tailored to an underserved small business segment, Mitchem said.
“What may not always be well understood, however, is that this workforce-centered design actually motivates savings in individuals who otherwise would not contribute,” she said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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