A Retirement Thanksgiving . . . From ‘Retirement’

  Thanksgiving has been called a “uniquely American” holiday — and as we approach the holiday season, it seems appropriate to take a moment to reflect upon, and acknowledge — to give thanks, if you will.

While it’s the celebration following a successful harvest held by the group we now call “Pilgrims” and members of the Wampanoag tribe in 1621 that provides most of the imagery around the holiday, Thanksgiving didn’t become a national observance until much later.

On Oct. 3, 1789, George Washington issued his Thanksgiving proclamation, designating for “the People of the United States a day of public thanks-giving” to be held on “Thursday the 26th day of November,” 1789, marking the first national celebration of the holiday. However, subsequent presidents failed to carry forward this tradition.     

Incredibly, it wasn’t marked as a national observance until 1863 — right in the middle of the Civil War, (also on Oct. 3) and at a time when, arguably, there was little for which to be thankful. Indeed, President Abraham Lincoln, in his proclamation regarding the observance, called on all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.”

We could surely stand to have some of that today. 

But for those of you who think the political harshness of today is a new phenomenon, consider that Thanksgiving was not made a legal holiday until 1941 when Congress named the fourth Thursday in November as our national day of thanks…in an answer to public outcry over President Roosevelt's attempt to prolong the Christmas shopping season by moving Thanksgiving from the traditional last Thursday to the third Thursday of November.

My List

With all of the strife and turmoil in our world, there remains much for which we can all be thankful. And in this, my second year of “retirement” — well, the list seems even longer. 

I’m once again thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan — and, particularly in these extraordinary times, that so many have remained committed to that promise. I’m hopeful that the incentives in SECURE and SECURE 2.0 will continue to spur more to provide that opportunity.

I’m thankful that so many workers, given an opportunity to participate in these programs, (still) do. And that, under new provisions in SECURE 2.0, those who gain new access to those programs will be automatically enrolled, if not immediately, then in the weeks ahead.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful for new and modestly expanded contribution limits for these programs — and hopeful that that will encourage more workers to take full advantage of those opportunities, even if the increases aren’t as big as last year’s (on the other hand, inflation isn’t as high, either).

I’m thankful for the Roth savings option that provides workers with a choice on how and when they’ll pay taxes on their retirement savings. “Retirement” reminds me that there’s a LOT to be said in favor of tax diversification, particularly the way benefits like Social Security and Medicare are means-tested.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, rising inflation, and competing financial priorities, such as rising health care costs and college debt.

I’m thankful for the strong savings and investment behaviors (still) evident among younger workers — and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful that our industry continues to explore and develop fresh alternatives to the challenge of decumulation — helping those who have been successful at accumulating retirement savings find prudent ways to effectively draw them down and provide a financially sustainable retirement. Trust me, knowing how much your retirement income will be is an essential element in knowing when you can comfortably retire.

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well diversified and regularly rebalanced investment portfolios — and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful (if somewhat skeptical) that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a couple of decades ago (though looking at the age 65 glidepaths for several leading providers, I’m again skeptical).

I’m thankful that the state-run IRAs for private sector workers are enjoying some success in closing the coverage gap, providing workers who ostensibly lacked access to a workplace retirement plan have that option. I’m even more thankful that the existence of those programs appears to be engendering a greater interest on the part of small business owners to provide access to a “real” retirement plan.

I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus — even if the ways to address it aren’t always.

I’m thankful that the ongoing “plot” to kill the 401(k) … despite some new voices … (still) hasn’t.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful to (still) be part of a team that champions retirement savings — and to be a part of helping improve and enhance that system.

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts.

I’m also thankful for the development of professional education and credentials that allow the professionals in our industry to expand and advance their knowledge, as well as the services they provide in support of Americans’ retirement.  I’m thankful for the consistent — and enthusiastic — support of our event sponsors and advertisers.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful — even in “retirement” — to continue to be able to make a “difference.” I’m thankful for those who seek me out at various events, or via email, to tell me how much they enjoy and appreciate my writing and speaking.

I am, of course, thankful for being able to “retire” — to kick back a bit. While I continue to get good-natured ribbing about how I don’t know how to “retire,” this second year of not working full-time has been a blessing in so many ways. I’m especially grateful to my wife for her encouragement and support throughout nearly four decades (amidst a LOT of sacrifices) and look forward to this next chapter in our lives. I’m thankful for the new home we’ve established as a base from which to enter that next chapter.  

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

(How) Are 403(b) Plans Different from 401(k)s?

 The primary difference between 403(b) plans and 401(k) plans is the type of employer offering the plan, but a couple of new surveys from the Plan Sponsor Council of America (PSCA) highlight some interesting design differences as well.

Believe it or not, 403(b) plans have been around longer—since 1958. 401(k)s didn’t arrive until 1978 and really were not effective until 1981 (see Talking Points: An ‘Unintended’ Consequence). 

Like its 401(k) cousin, it was initially created under part of the Internal Revenue Code (Section 403(b)!)., and—like the 401(k)—it was designed to allow employees of certain tax-exempt organizations, such as public schools, hospitals, and religious institutions, to contribute to retirement savings on a tax-deferred basis. 

Over time, many of the things that differentiated the two (notably contribution limits) have been eliminated or at least narrowed. That said, their different histories and distinct employee populations mean that notable plan design differences remain.

What’s the Same (or Pretty Close)

According to PSCA’s 2024 403(b) Plan Survey, a quarter (24.4%) of 403(b) plan respondents now use auto-escalation, and another fifth (20.2%) permit voluntary escalation. That’s pretty consistent with findings from the (soon-to-be-published) 67th Annual Survey of Profit-Sharing and 401(k) plans, where 24.2% use automatic escalation for all participants, 8.9% do so for “under-contributing” participants, and 30.1% permit voluntary escalation.

One area in which 401(k) plan designs have traditionally lagged is periodic distribution options. However, perhaps due to the recent focus on retirement income, this gap has narrowed significantly. 

Among 401(k) plan respondents, two-thirds (68.8%) now offer a retirement periodic option (though 83.2% of the largest plans do), nearly identical to 403(b) plan respondents where 67.7% offer the periodic payment option, as do 91.2% of the larger plans.  

Another area of striking consistency is financial wellness programs. A quarter of responding 403(b) organizations provide financial wellness programs to employees—but that’s 44% of the largest plans (> 1000 workers) versus 10%-ish for plans with less than 200). Most (59%) deliver that online.  As for 401(k) employers, 27.1% provide those overall, versus 52.8% at the largest plans (and in the teens for those with 200 employees or less.

Most 403(b) plan organizations (78.4 percent) monitor at least one participant behavior. The most common behavior monitored by those plans was participant deferral rates (60.6 percent of plans), followed by loans (55.6%) and hardship withdrawals (51.4 percent of plans)—mirroring the tendency among 401(k) plan sponsors (78.3% deferral rates, 56.9% loan usage, and 50.9% hardship withdrawals).

What’s Different?

According to PSCA’s survey, while there has been movement in investment policy statements, only about half of 403(b) plan survey respondents (57%) have an IPS in place—though, in fairness, a full third (32.4%) didn’t know. Contrast that with the (soon-to-be published) 67th Annual Survey of Profit-Sharing and 401(k) Plans, which found those in place at 82.4% (here again, 12.5% weren’t sure, however).

Of course, there’s having the IPS to provide structure, and then there’s the frequency of review.  Among 403(b) plan respondents, annual was the most cited frequency (44.5%), with quarterly (34%) ranked second. Among 401(k) respondents, quarterly (64.8%) was the most common (even more so among larger plans), and annual was a distant second, cited by just 16.2%.

Automatic enrollment is (slowly) gaining traction in 403(b) plans; use increased yet again and is now available in 35.5 percent of plans — that’s up a third in just two years. Here, as with 401(k) plans (63.8% overall and 74.3% among the largest), more than half of large organizations employ automatic enrollment in contrast to just 21 percent of small plans, which is up from just eight percent of small plans a year ago.

Three percent of pay remains the most common default deferral rate among 403(b) plan respondents, used by 32.1 percent of plans, while 30.2 percent have a default rate greater than that.  Meanwhile, a default rate of more than 3% was already the default for two-thirds of 401(k) plan respondents to the 2023 survey.

Considering their history, it should be no surprise that 403(b) plans were much more likely to provide an annuity option; 56.7% overall and 70.6% of the larger plans do so for retirement.  That contrasts with 401(k) plans where the availability is half that—29% overall and 36.6% among the larger plans.

Another unsurprising difference can be found in the availability of ESG funds on the plan menu; just 6.4% of 401(k) plans did so in the 2023 401(k) survey, whereas those options were found at nearly four-in-10 403(b) plans, irrespective of plan size. 

Among 403(b) plan respondents, 42% offer a managed account option (29% of participants use it when offered) versus 50.4% of 401(k) plan survey respondents (68.5% among larger plans).

Oh – and one big difference not captured on these surveys – 403(b) plans (still) can’t invest in collective investment trusts (CITs). Apparently, some think that several decades of experience with 401(k)s isn’t enough for 403(b) adoption.

Of course, these similarities – and differences – are viewed from a macro lens.  We tend to talk about 401(k)s (and 403(b)s) as though these plans are designed and administered for the benefit of monolithic entities, but the industries and demographics for which these designs are applied are vastly different. 

Particularly in the 403(b) market, those differences often include whether a traditional defined benefit plan is part of the benefits equation—and that makes a huge difference in terms of positioning and ultimate benefits delivery—something that should always be considered in any kind of side-by-side comparison. 

Still, it’s good to know—and appreciate—not only the differences but the options and the rationale behind them as we work together to help support, expand, and enhance the nation’s private retirement system.

-          Nevin E. Adams, JD 

When ‘More’ Retirement Readiness Is (Much) Less

  A new study shows how a proposed government-run retirement program said to increase coverage could actually undermine the nation’s retirement readiness.

The report — by Morningstar’s Spencer Look and Jack VanDerhei (yes, that Jack VanDerhei) — considers the potential effects of the Retirement Savings for Americans Act (RSAA) on retirement-income adequacy for Generation Z and millennial workers. The proposed legislation — which aims to expand retirement coverage for American workers by creating a federal retirement plan for those not covered through their employer — has been introduced in both the House and the Senate.[i] 

The legislation has been positioned as a means of helping close the coverage gap — of creating not only an opportunity for those without access to a retirement plan at work to save for retirement, but to receive the incentive of a matching contribution from the federal government. How then, would such a proposal undermine the nation’s retirement security?

‘Under’ Mining

As it turns out, in a variety of ways. 

Structurally, and significantly, it directly competes with the existing private retirement system — providing an alternative that employers might well consider rather than adopting a new plan on their own. 

That said, and even more significantly, it seems likely to encourage employers that already provide a plan — and matching contributions — to abandon those in place of the proposed government-run alternative. 

Finally, and compounding the damage of the first two, it does so with a structure that would not only have workers contributing less (generally speaking) than they do with the current system[ii] — and with a match that runs well below that found with the current system.[iii] 

The Damage Done

So, how much damage could this proposal wreak on the nation’s retirement security? The Morningstar researchers found that wealth could decrease by as much as 20% for Gen Z workers and 12% for millennial workers.

Those are some jaw-dropping numbers, to be sure — but the Morningstar researchers apply what seem to be reasonable, conservative estimates to get there.

First, since workers would be able to opt-out of this program, they assumed an opt-out rate roughly half that of the current state-run programs (that don’t have a match) — 20% (that’s about double the rate in private sector plans, which enjoy the backing and support of their employer as well as the convenience of payroll deduction).

More than that, one of the biggest assumptions in the researchers projected impact had to do with employer behaviors in response to the RSAA alternative — and here they used two different scenarios.  In one — a “best case” scenario — they assume that no plans with a thousand participants or more would do so (but that a third of those with less than a hundred participants, and a quarter of those with 100-999 participants would). 

However — the one that they said more likely represents the longer-term impact — they assumed anywhere from a third to 22% of employers of ALL sizes that currently offer a plan would abandon it.[iv]  

The Bottom Line

The research provides valuable insights as to the potential calamitous impact of this proposal on the nation’s retirement security — its introduction ironically just ahead of when some of the more impactful provisions of the SECURE Acts on new plan formation are scheduled to take hold. 

There is, however, yet another factor that could even more dramatically impact these projections — something that the bill’s sponsors have, for the very most part, avoided speaking to; how would this expansive government match program be paid for? 

The answer to that question — which might well have an even more deleterious impact on retirement security — was at least hinted at a couple of months back by the RSAA’s sponsor Sen. Hickenlooper — who said that he’d be willing to lower 401(k) tax incentives and contribution limits to pay for this program.

Talk about robbing Peter AND Paul…

- Nevin E. Adams, JD

 

---

[i] Sponsored by Sens. John Hickenlooper (D-CO) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th), the bill is championed by the Economic Innovation Group (EIG), an organization founded by Napster and Facebook billionaire Sean Parker and Steve Glickman, former Senior Economic Advisor at the National Security Council under President Obama. Rocket Mortgage majority owner Dan Gilbert is a member of the organization's Founders Circle, an advisory board with no governance responsibilities. 

[ii] As the Morningstar study notes, the default RSAA contribution rate of 3% is significantly lower than typical contribution rates in DC plans. For instance, the average deferral rate in Vanguard’s "How America Saves 2024" report was 7.4%. Notably, even workers earning less than $50,000 per year had deferral rates of 5.1% or more.

[iii] “Additionally, employer matches for DC plans do not start to phase out for workers earning more than the median income level,” the study explains. “Therefore, for many workers, including those earning less than median income, participation in an employer sponsored DC plan would result in larger overall contributions than the RSAA federal account. Results for the RSAA improve when we assume federal program participants increase their savings rate to 7%, as those earning less than median income would get the full 5% federal match tax credit (the "Above Default Saving" scenario). However, while some participants would save at a higher rate, most participants are likely to contribute at the default. This is because the RSAA does not include an auto escalation feature, which is a key driver of the higher contribution rates seen in DC plans.”

[iv] “To elaborate, the RSAA would likely stymie new plan creation, and while the change may primarily affect smaller plans in the short term, we do think that access to plans, even with larger employers, would go down in the long run.”

An ‘Unintended’ Consequence

"Unintended consequences" are often a euphemism for something bad. But not always. Take the 401(k), for example.

While the nation turns its attention to Election Day, Nov. 6 happens to be the “birthday” of the 401(k). Well, kind of. It’s actually the anniversary of the day on which the Revenue Act of 1978 — which included a provision that became Internal Revenue Code (IRC) Section 401(k) — was signed into law by then-President Jimmy Carter. 

That wasn’t the “point” of the legislation of course — it was about tax cuts (some things never change). It reduced individual and corporate tax rates (pulling the top rate down to 46% from 48%), increased personal exemptions and standard deductions, made some adjustments to capital gains and created flexible spending accounts. 

But it did, of course, also add Section 401(k) to the Internal Revenue Code.

That said, so-called “cash or deferred arrangements” had already been around for a long time — basically predicated on the notion that if you don’t actually receive compensation (frequently an annual bonus or profit-sharing contribution in those times/employers), you don’t have to pay taxes on the compensation you hadn’t (yet) received.

That approach was not without its challengers (notably the IRS) and, according to the Employee Benefit Research Institute (EBRI), this culminated in IRS guidance in 1956 (Rev. Rul. 56−497), which was subsequently revised (seven years later) as Rev. Rul. 63−180 in response to a federal court ruling (Hicks v. U.S.) on the deferral of profit-sharing contributions.

Enter the Employee Retirement Income Security Act of 1974 (ERISA), which — among other things — barred the issuance of Treasury regulations prior to 1977 that would impact plans in place on June 27, 1974. That, in turn, put on hold a regulation proposed by the IRS in December 1972 that would have severely restricted the tax-deferred status of such plans. But ERISA also mandated a study of salary reduction plans — which, in turn, influenced the legislation that ultimately gave birth to the 401(k).

So, how did something that became America’s retirement plan get added to a tax reform package? Rep. Barber Conable, top Republican on the House Ways & Means Committee at the time, whose constituents included firms like Xerox and Eastman Kodak (which were interested in the deferral option for their executives), promoted the inclusion which added permanent provisions to “the Code,” sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980, and regulations were issued Nov. 10, 1981 (which has, at other times, also been cited as a “birthday” of the 401(k), since that was what allowed/encouraged employers to act on it).

The ‘Fathers’ of the 401(k)

Now, it’s said that success has many fathers, while failure is an orphan. The most commonly repeated story is that Ted Benna saw an opportunity in this new provision, recommended it to a client (which, ironically, rejected the notion), but then promoted it to a consulting firm (The Johnson Companies), which then embraced it for their own workers. The reality is almost certainly more nuanced than that, though Mr. Benna (who has in recent times derided what he ostensibly created) has managed to be deemed the “father” of the 401(k) by just about every media outlet in existence.

What we do know is that in the years between 1978 and 1982, a number of firms (EBRI cites not only The Johnson Companies, but FMC, PepsiCo, JC Penney, Honeywell, Savannah Foods & Industries, Hughes Aircraft Company and a San Francisco-based consulting firm called Coates, Herfurth, & England) began to develop 401(k) plan proposals, many of which officially began operation in January 1982.

Now, it’s long been said that 401(k)s were never intended (nor designed) to replace defined benefit pensions — true enough.

But consider that in 1979 only 28% of private-sector workers participated in a traditional defined benefit (DB) plan, with another 10% participating in both a DB and a DC plan. In contrast, the Bureau of Labor Statistics reports that 70% of private industry workers had access to a defined contribution plan in 2024. As of December 2023, American workers have set aside nearly $11 trillion in defined contribution plans — and there’s another $11.4 trillion in traditional IRAs, nearly three-quarters of which were opened with rollovers (likely from DC/401(k) plans). 

The reality is that the nation’s baseline retirement program is, and remains, Social Security. But for those who hope to do better, for those of even modest incomes who would like to carry their current standard of living into post-employment, the nation’s retirement plan is, and has long been, the 401(k). And despite a plethora of media coverage and academic hand-wringing that suggests they are wasting their time, the American public has, through thick and thin, largely hung in there — when they are given the opportunity to do so.

That may not have been the intent of the architects of the 401(k), or its assorted foster “parents” over the years. But these days it’s hard to imagine retirement without it.

So, happy birthday, 401(k). And here’s to many more!

Nevin E. Adams, JD

I know that some would argue that workers effectively bargained for lower wages in return for the pension benefit. Maybe once upon a time, certainly in labor situations where there actually was an active bargaining component. But I suspect that most non-union private sector workers post-ERISA felt no such trade-off.  

Et Tu, Shlomo – A Response to Benartzi’s Response

  Editor’s Note: To his credit, Shlomo Benartzi took the time to respond to my recent column on his Wall Street Journal op-ed on LinkedIn (you can read it here) — though to my read, the concerns expressed on where such a proposal could lead remain. Consider this a brief follow-up.     

Shlomo,

Whew! I can’t tell you how relieved I am/was to have you clarify that you are NOT advocating a government-run retirement plan system. I guess you referring to three specific government-run systems as models to be considered persuaded me that you thought those were good examples for us.

You’ve now pointed more specifically to the Australian model where “workers remain by default with their first plan provider, even if they change jobs.” But as I am sure you know, there are some significant differences between that system and ours — differences that, to my eye, wind up being significant. 

First and foremost, that system is funded primarily by mandatory employer contributions at a fixed rate (on its way to 12%). So, there is no default “reset” when you change jobs — your new employer just keeps putting in the same amount your previous one did. I feel that this default reset was a primary motivator in your recommendation — but that system and ours are “apples and oranges” when it comes to employee contribution defaults. They don’t have the problem you are trying to solve because the government dictates the contribution amount — with no acceleration.

Secondly, and perhaps because we’re (only) talking about employer contributions, there is no access to that Australian system money before retirement (or conditions, like disability, similar to it). I think that makes this money — and feelings about it — different than employee salary deferrals. My financial circumstances change over time, and as your op-ed acknowledges, might do so particularly with job change. I’d have no such option in that system. Good for retirement, perhaps — but for life?      

Thirdly, while the Australian system DOES have private-sector money managers (and a handful of system trustees), those are government overseen and provide a SIGNIFICANTLY smaller list of choices than one would find here. I don’t doubt that those smaller numbers (it’s a smaller market, after all) compete for business, but I haven’t seen the kind of innovations there that we’re seeing here every day (things like the auto-portability provisions/network, which as I wrote, would significantly smooth the rollover process/outcome — PARTICULARLY for small balances that were of a particular concern in your op-ed). While it may not be a government-run program per se (beyond mandating contributions, restricting access until retirement and oversight of the providers), there’s clearly a strong government “influence.”

Finally, people continue making a big deal about how employment patterns in the U.S. have changed — but the data just doesn’t support that. Oh, sure — we now have a label for some of that (“gig” workers), but in the private sector, tenure and turnover have been remarkably consistent…since WWII. Lifetime employment is (and was always) a myth outside of the public sector and certain union occupations.

Shlomo, you’ve been a great supporter and advocate for retirement savings — someone I deeply admire and respect. My comments weren’t meant as an effort to forestall new thinking — rather I see this remarkable and dynamic industry constantly working to improve and expand. 

Not so long ago we didn’t have a reset default “problem” because (a) there were no defaults, and (b) there was no contribution acceleration to reset from. Those are positive developments — that the private retirement system is working on. Let’s not throw that “baby” out with the bathwater by reducing choice and access.    

Your Friend,

Nevin