By Cyril Tuohy
Two retirement plan experts have proposed that the nation embark on a new age of reconstruction — retirement plan reconstruction, that is — in order to clean up what they see as the hodgepodge of defined contribution (DC) plan accounts left by decades of piecemeal approaches to retirement and the decline of defined benefit pensions.
The plan, put forth by Russell L. Olson and Douglas W. Phillips, calls for the creation of a single, private, defined contribution pension system called trusteed retirement funds (TRFs). This proposed system would cover every American and would be governed by a single set of rules.
“The reconstruction of our retirement system is something our nation needs to do — now,” Olson and Phillips wrote in the paper posted on the Pensions & Investing website.
The rise of the defined contribution system, which was never meant as a primary retirement pillar, has led to no less than 14 different kinds of defined contribution plans sponsored either by employers or initiated by individuals.
Olson, an independent consultant and former director of worldwide pension investments for Eastman Kodak, and Phillips, senior vice president of institutional resources at the University of Rochester and chief investment officer for the university’s $2 billion endowment, cite Australia’s “superannuation” retirement system as a possible model for the United States.
In the paper titled “Let’s Save Retirement,” Olson and Phillips write that their proposal is designed as a near-term solution to the underfunding of retirement accounts.
To provide a sound retirement system, the nation needs to meet three conditions, the authors write: 1) People need to contribute a lot more to their retirement accounts, 2) the funds in those accounts need to be managed more efficiently, and 3) retirement accounts need to be structured in such a way as to minimize the range of risks investors face after they leave the workforce.
If those three conditions are met, then millions of workers won’t have to work until age 70 just to stay above the poverty line, Olson and Phillips said.
“DC plans today operate under a patchwork of confusing regulations, and too few DC plan participants are competent to manage their investment in order to attain financial independence,” the authors write in their 47-page paper.
Despite the call by financial advisors for workers to save early and often, surveys routinely find that too many people aren’t saving at all, and of those who are saving, many aren’t saving nearly enough to get them through retirement.
Earlier this week, Bankrate.com released a survey that found 36 percent of the 1,003 respondents had nothing saved for retirement.
The survey also found that 69 percent of respondents between the ages of 18 and 29 — the key early years when assets have more time to grow in higher-risk investments — had nothing set aside for retirement.
Even when employers offer “free money” in the form of a matching contribution, not all employees take advantage of it, other surveys have found.
Olson and Phillips are the latest plan experts to call for reform of the defined contribution model, which has become the de facto retirement pillar for millions of workers.
Critics of the nation’s defined contribution system say the plethora of retirement strategies are costly, confusing and unwieldy. In many cases, they don’t even generate the returns investors think they are getting.
Fees eat into returns and workers are often poor investment strategists, investing too conservatively and too early, and moving money from one fund to another at the wrong time through ill-advised market timing or failing to consider tax implications.
At the same time, defined contribution models have aspects to them that many people like. They offer portability, flexibility and convenience, particularly when mated with the payroll deduction offered by an employer sponsoring a 401(k) or 403(b), for example.
The authors propose the creation of trusteed retirement funds sponsored by trustees with fiduciary responsibilities, thereby relieving employers of the fiduciary duty that comes along with sponsoring a retirement plan.
These TRFs would be funded through payroll deductions, and would offer immediate or deferred indexed annuities to provide retirees with guaranteed income options.
A new Federal Longevity Insurance Administration would enable private insurance companies to offer affordable annuities, Olson and Phillips wrote.
Defined benefit plan sponsors would give each employee a choice of continuing with the defined benefit plan or converting to the TRF.
Legislation sponsored separately by Democrats and Republicans would make it easier for employees to contribute to their defined contribution accounts. President Obama earlier this year also proposed the creation of "myRA" — a form of employer-sponsored retirement account with a very low barrier to entry in the form of only a few hundred dollars.
The proposed bills in Congress and the president’s initiative, however, amount to adding new layers to the defined contribution retirement model which Olson and Phillips say is already too complicated and not as effective as it could be.
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 firstname.lastname@example.org.
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