I recently met some friends for lunch – but the only seats available were those high-back stools you basically have to climb up to in order to sit. But that wasn’t the worst of it.
As it turned out, my seat…wobbled. Which is to say that it basically rocked even as I sat there. Now, I’m all about rocking chairs in the proper setting, but when you’re trying to eat a meal (or enjoy a cold beverage), it’s annoying – particularly if you are one of those lean on the table types – and especially when your seat is high off the ground.
And as I was sitting there desperately attempting to maintain my
balance (it didn’t help that my companions found my predicament
humorous), it called to my mind that retirement security has long been
said to be based on the concept of a three-legged stool.
While the reference is somewhat dated, Social Security benefits were said to be one leg of a three-legged stool consisting of Social Security, private pensions and personal savings/investment.[i] There were, of course, some fallacies in the comparison, not the least of which was that those three legs[ii] (like that of my wobbly stool) weren’t equal, but they were all seen as essential to the overall stability of the end result. Time may have passed, and the components may have shifted, but crafting a credible, sustainable retirement income plan continues to require multiple prongs of support – and yet today, even those traditional legs are in need of some attention.
Secure the Foundation
As with my initial attempts to correct the stool’s wobble, first and foremost, Social Security (and Medicare) needs to be shored up.
To fully appreciate just how essential this program is, and how integral to a complete solution, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits. Indeed, considering how many Americans rely on Social Security as their sole – or at least a primary – source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers.
With all its funding shortcomings and demographic challenges, the “solution” is straightforward[iii] (raise FICA withholding rates and/or the income levels to which those rates are applied, or means-test and or reduce benefits). That said, the cost – political and economic – and will to do more than talk about the need to do more – remains sadly lacking.
It is, quite simply, “job #1” – and a foundation upon which everything else depends. Needless to say, perhaps – the sooner the better.
Open More ‘Doors’
The simplest solution to my wobbly stool was to find – another stool. Arguably, that just transfers the problem to another future diner, but... as it turned out, there were none available. Indeed, despite the protestations of a distinct, though all-too-readily published minority, the current private retirement system works well – but only for those who have access to it. While there’s little (other than human nature) preventing folks from simply going online and opening an individual retirement account – few do. In fact, data consistently shows that even modest ($30,000-$50,000 salary) income workers are twelve times more likely to save for retirement if they have access to a plan through work than those who don’t. But many – and these days that’s primarily those employed at smaller businesses – still don’t. Our retirement vision of the future simply has to include universal availability. In the private sector only about half of full-time workers have that opportunity, and that’s a problem.
Now, small businesses are kept pretty busy just trying to stay IN business, but they have the same need to attract and retain talent as the Fortune 50, and a retirement plan benefit can certainly play a role. The recently passed SECURE 2.0 Act of 2022 provides massive incentives to do so (tax credits that, for those with 50 employees or less, basically make the plan free for the first three years), and, for those put-off by the potential complexity of providing those benefits, a “Starter K” that’s significantly streamlined compared with the traditional 401(k). Yes, there’s a provision that will require new plans of most businesses formed after Dec. 29, 2022, to offer automatic enrollment – but that will certainly help those workers save, and save more effectively.
Let’s face it – even when you build it, they don’t always come. My guess is that all this will be effective to some degree – but that it won’t completely close the so-called “coverage gap.” But, as the dramatic new incentives in SECURE 2.0 have only just come online, we should probably give them a little time to sink in and take hold.
Improve the ‘Offramp’
At one point in my annoyance with my stool (yes, I had unsuccessfully attempted to remedy the situation with a wadded up paper napkin, but couldn’t quite get the balance correct) – and I gave serious thought to simply walking out and trying a different establishment (one that had better seating). But the food had been ordered, and I was the only one (apparently) struggling with the imbalance, so I decided to tough it out (though I have to say that dining whilst trying to maintain one’s balance doesn’t make for good digestion).
It is ironic that plans ostensibly designed to (ultimately) provide income in retirement, do such a poor job of providing…income in retirement. Now you can argue that the focus of these plans is to help workers accumulate savings FOR retirement, and that after that, they’re on their own – but there’s plenty of evidence to support the need for helping workers save and invest properly. And trust me, that’s a lot simpler than trying to figure out how to structure withdrawals in retirement. It may not be a legal obligation, but there’s a case to be made for employers who want to help assure that these workers save.
All one has to do is look at the tremendous success of target-date funds – not only in the rate of adoption by plans and participants, but in how much better diversified 401(k) accounts are today versus a generation ago when everybody was making individual investment decisions. Already popular, that pace of take-up was spurred by the guidelines contained in the Pension Protection Act of 2006, and subsequent guidance from the Department of Labor. The question that needs to be answered then is, how/can we do something similar for helping get those retirement savers invested in a retirement income solution – but perhaps more critically, how can we get plan sponsors comfortable enough with the concept to adopt it the way they have target-date funds.
The original SECURE Act took several key steps – helping address concerns about portability – how a retirement income account could be transferred during a recordkeeping conversion, or during an employee termination, as well as putting some additional clarity around a safe harbor to provide comfort to plan fiduciaries. At the same time, some intriguing new approaches emerged, as well as some refurbished solution – but then COVID-19 struck, and plan sponsors had much more to deal with than adding a retirement income feature to their plan, as they worried about the Great Resignation, navigating the sensitivities around working from home, and volatile markets.
The bottom line is that we don’t yet know how much these solutions – and the new legislative structures – will move the needle here. What we do know is that we need solutions that are cost-effective, relatively simple to explain, and readily available – and I know the retirement plan of the future will include those.
Accident ‘Tell’
While some still maintain that things like the 401(k) were an “accident,” in the space of a few decades it has become America’s retirement savings plan – in a way that the traditional defined benefit pension plan never really did in the private sector. That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs – and it’s not been an accident. The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time – and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.
There are many factors that influence these directions – legislation certainly plays a role, as does regulation – but ultimately it comes down to having goals, realizing that employers and the workers they employ are dealing with a wide variety of needs and circumstances, and trying to find a balance between them. To that end, the guidance and technical assistance of retirement plan advisors and third-party administrators are, and will continue to be, essential voices.
Before our meal was finished, a table nearby opened up, and I was able to swap my wobbly stool for a more secure seat. Similarly, while a full resolution might not come to be as soon, or as well as we might hope/think – it seems to me that there are changes afoot and in place that have, and are continuing to move us in the right direction(s). Those will come to fruition all the sooner with the support and encouragement of trusted advisors, TPAs, recordkeepers, and the retirement industry generally.
Because if there’s anything more annoying than trying to sit on a wobbly three-legged stool, it’s not having any place to sit at all.
[i] These days, it’s arguable that private pensions and personal savings have been combined into retirement plan savings accounts, such as 401(k) and 403(b). Others have opined that there’s really a FOUR-legged stool, with that other leg being home equity.
[ii] According to Social Security, “the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, who was an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, who was an important private-sector authority on Social Security, used the image in a speech in 1949 at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of: private insurance; group insurance; and Social Security.”
[iii] I was no fan of this in 1983 when all of this was done either – but…
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