The statistics are undeniably grim:
A recent Frontline documentary said 50 percent of Americans say they can’t afford to save for retirement, a third have little or no money saved and borrowing from retirement accounts is at a 10-year high.
The New York Times cited even more troubling statistics: 58 percent of Americans have neither a pension plan nor a 401(k), while a third rely on Social Security for 90 percent or more of their income in retirement.
And Dr. Annamaria Lusardi, Denit Trust Distinguished Scholar in Economics and Accountancy at George Washington University, says 50 cents from every $1 “leaks” from retirement accounts before retirement from withdrawals and loans.
With statistics like these, it’s no wonder experts and politicians are calling for some sort of mandatory retirement planning at the employer level.
Financial luminaries ranging from BlackRock CEO Laurence Fink to Dr. Meir Statman, Glenn Klimek Professor of Finance atSanta ClaraUniversityinCalifornia, have advocated the concept.
Suggestions have included everything from emulation of foreign models to the creation of a new kind of retirement plan, á la the one proposed last year by Sen. Tom Harkin (D-Iowa).
His Universal Secure and Adaptable (USA) Retirement Funds proposal, aimed at employers not currently offering a pension plan, is supposed to make it easier for them to do so.
Other countries do far better at keeping seniors from the cat food line.
In Australia, employers contribute a mandated 9 percent —soon to be 12 percent — of employee pay into a 401(k)-type vehicle that supplements the country’s social security program. Almost nobody passes up a chance to participate.
Dutch employers also contribute to the pool that supplements the country’s version of social security; the government takes that money and turns it into an annuity so retirees can’t run out of money. And inEngland, fees are kept low thanks to government pressure on fund managers.
Other countries have other variations; many proposals in theU.S.suggest adopting one or more of them.
In a recent article, Statman said a “paternalistic” mandatory private defined-contribution savings accounts should be added to the current U.S. system, and pointed out that U.S. universities already use such plans.
He cited other solutions, including Israel’s mandatory defined-contribution retirement savings program that requires retirees to prove “sufficient resources beyond mandatory savings to sustain them in retirement” before it permits lump sum withdrawals.
But not everyone is in favor, either of mandatory retirement savings or of following another country’s example.
Said Lusardi, “We do not have only a saving crisis, we have a debt crisis, meaning most people are dealing and struggling with debt. It … could be detrimental to deal with these problems by mandating people to save more; in this way we take away liquidity and people will have even less to pay off debt. … Mandating everybody to save may make some people worse off.”
Marci Supovitz, president of the National Association of Plan Advisors and principal at Boulay Donnelly & Supovitz Consulting Group Inc., said, “I think in a lot of ways it would be a mistake to assume that because something works in another country it will work in the U.S., because every country’s culture is different. There’s distaste in theU.S.for mandating such things.”
She said another mandatory system on top of the one “we already have … called Social Security” would be difficult to sell.
Statman disagreed, saying, “Let me note that a regular defined benefit plan is a mandatory plan. (Government employees), for example, have a defined benefit plan; it’s a mandatory plan. … When you say to an American, ‘Would you rather have freedom or oppression?’ they’d say freedom, but I don’t think they think that way about an employer withholding from their pay to give them a pension.”
It’s more a question of framing, Statman said, adding that if a mandatory plan were cast more as a kind of pension plan but without a guarantee, it would be more acceptable. “The problem really is not with people who want freedom and know how to manage it, but the people who are like children and don’t know how to manage it.”
But there’s another, more familiar solution at hand, according to some.
“Do you need another mandatory program, or can you work with what is already in place?” asked Joe Ready, executive vice president and director of Wells Fargo retirement and a vice president and board member of the SPARK Institute, the trade group for the retirement plan services industry.
He pointed to the 401(k) plan as a solution. “If people are in the plan, and if they’re participating at a decent level, and if the employer contributes, and if participants invest properly, they do OK,” he said.
Yet with that many “ifs” involved, Ready acknowledged that work must be done to make the system effective for a broader base of the population — particularly because many employers offer no plan at all.
SPARK advocates simplifying plans so that smaller employers will participate. Also, said Ready, shared responsibility — among employee, employer and government — is necessary for the system to work better. Currently, he said, responsibility is skewed toward the employee.
Are advisors having a say in any of this?
According to Supovitz, it’s early days yet, but they will.
“NAPA, which is the primary voice in Washington for advisors in this industry, will definitely have a strong voice in the debate,” she said.
While “the discussion is in the very, very early stages,” and because “the proposals and discussions surrounding this issue (haven’t) become something that anybody views as imminent,” she added, there hasn’t yet been a lot of feedback from advisor members on the issue.
Still, “we have a strong government affairs group, and we have to think about what’s best for America and how we as frontline advisors can really give meaningful input on the strategy.”