What If There Was No ERISA?

 New research puts a new twist on “A Wonderful Life” – answering the question, what if there hadn’t been an ERISA?

ERISA is, of course, the Employee Retirement Income Security Act of 1974 which just turned 50. The analysis[i] – put together by Morningstar Retirement’s Director of Retirement Studies Jack VanDerhei and Associate Director of Retirement Studies Spencer Look – first looks at the current “status quo” retirement readiness impact (more specifically, retirement readiness shortfalls). It then looks at the potential result if there had been no ERISA – or, perhaps more precisely if there had been no individual account retirement plans (defined contribution and IRAs), though allowance was made for the probability of saving to an IRA. 

Now, anyone with a realistic assessment/awareness of the limited availability of traditional pension plans in the private sector (before AND after ERISA’s passage) can hardly be surprised to find that the absence of individual accounts would have a significant negative impact. That said, you might be surprised at the size of that impact. 

The research notes that, when aggregated across all four income categories, the probability of Gen X households running short of money in retirement (granted, this is running short by as little as $1[ii]) would increase from 47% under the status quo to 59%. Millennials would fare worse, with the aggregate probability increasing from 44% to 69%, and Gen Z households would see their exposure soar from a risk of 37% in today’s environment to what the researchers termed a “devastating 72%” without individual account retirement plans. 

The paper also projects the outcomes across various income and education demographics, as well as industry, gender and race. To sum it up, single females, Hispanic Americans, and non-Hispanic Black Americans were found to be at a higher risk of retirement shortfalls. Needless to say perhaps – though the paper does – “[t]he elimination of DC participation and savings would drastically reduce the probability of a successful retirement, particularly for middle-income groups, as they heavily rely on these plans.”

Considering the positive impact of those individual accounts – albeit one limited by the status quo reality of access – it should come as no surprise that a projection that greatly broadens that access – alongside automatic enrollment and auto-escalation (as proscribed in the Automatic IRA Act of 2024) notably improves retirement prospects. Indeed, the researchers find that it could substantially improve retirement outcomes, with an aggregate average wealth ratio increase of 23.8% – and that’s assuming an opt-out rate of 30%![iii]   

All in all, just like good old George Bailey, it’s easy to underestimate the potential impact of the individual account regime that ERISA ultimately fostered – until you are able to imagine what things would be like without it. That said, this research affirms the positive impact – and puts some numbers behind it – while also affirming policy considerations for the future. 

Did I hear a bell ringing…

 - Nevin E. Adams, JD 

---

[i] With a title nearly as long as the paper itself “The Evolution of Retirement-Income Adequacy Under ERISA With a Focus on Defined-Contribution Plans: A Review of the Status Quo, Counterfactual Evidence, and an Analysis of Changes for the Future.”

[ii] Also worth noting, this analysis, unlike most other projection models – takes into account the potential impact of long-term care expenses.

[iii] Which turns out to be close, but less than opt-out rates in a number of the current state-run IRAs.

‘The 37-Year-Olds Are Afraid of the 23-Year-Olds Who Work for Them’

I recently stumbled across a provocative article in the New York Times with that intriguing headline.

Honestly, I laughed out loud (drawing my wife’s quizzical attention on an otherwise quiet Saturday morning) when I read it. I’m a (proud) Boomer, of course, and while Gen X basically slipped quietly into the workplace (much to their frustration), Millennials (to my experience) landed with a bang, upending traditional norms of business and meeting etiquette, demanding a voice that seemed well beyond their experience (and, yes, sometimes knowledge)—and, frustratingly (certainly for those of us who played by a different set of rules at their age), getting it. 

So the notion that they were now feeling the same kind of pressures from the next generation of workers (a.k.a. Gen Z) was somewhat humorous to me in a “so, how do you like it?” kind of way.  

Yes, having lived through the not-so-subtle eye-rolling of younger co-workers (and the more recent dismissive “OK, Boomer” commentary), I couldn’t help but find some small modicum of comfort in the notion that that generation was, essentially, being hoisted on its own generational “petard.” 

The problem—particularly for those of us who still want to be seen as “cool”[i]—is that those boundaries are fluid and moving. It’s hard to keep up when you’re not naturally immersed in the culture of the day—it takes effort and persistence, particularly in an era where you lack the opportunity of that interaction in a physical workplace. And, honestly, one’s own experience (and sometimes what we’d label “common sense”) sometimes dictates that those new “norms” are likely only a passing fad (and one that you’d look foolish embracing, regardless).

‘Kids These Days’

Comfortingly enough, the article goes on tell us that researchers call this the “kids these days” effect—and note it has been happening for millennia. Moreover, the author notes that this phenomenon means that “each new generation, christened by marketers and codified by workplace consultants selling tips on how to manage the mysterious youth, can strike the people who came just before them as uniquely self-focused.”[ii]

When I was new to this business, I would joke that nobody comes out of college with plans about retirement, much less thinking about working with retirement plans. And yet, if you’re reading this, odds are you find yourself in at least the latter category. 

That said—and while much is made of the need to communicate “differently” about retirement with younger workers (see “Is It Time to Retire Retirement?”)—it’s never been easy to garner the attention of the not-nearly-ready-for-retirement generation(s) to focus on the financial necessities of that day in the (distant?) future when they’ll need to live on… something. 

‘Different’ Perspectives

There’s little doubt that “retirement” will be different for the next generation—and that the preparations our industry has long espoused could stand some updating. After all, there’ll be no golden watch, almost certainly no pension (if they’ve toiled in the private sector), and as for Social Security? Well, who knows? On the other hand, odds are their labors won’t be stymied by physical limitations, limited by locale—or perhaps even a commute longer than the path from their bed to their couch. Indeed, their work may be such that it never has to—or perhaps gets to—end. And—not insignificantly—they’ll also likely have a longer lifespan over which to consider those alternatives.[iii]

Let’s face it: New generations have long been disruptive to the “status quo,” to the “normal” state of affairs, to the protocols to which we’ve all become accustomed and/or established. Inevitably, when it’s our turn in that cycle, the pace of change is annoyingly slow, the receptivity to new ideas mind-numbingly obtuse—and when our perspective is the status quo… well, we see things differently.   

And all that likely means that if there’s anything to “fear” about those newer to the workforce, it’s that they might make the same mistakes we did.

- Nevin E. Adams, JD

---

[i] I’m sure that wanting to be seen as “cool” is probably no longer… 

[ii] And indeed, if there was ever a generation that was (once upon a time) dismissed by its elders as “uniquely self-focused,” it was mine.

[iii] They’ll also have some new tools to help—things like automatic enrollment, automatic escalation, target-date funds and managed accounts. 

Generations ‘Grasp’

If you’re still struggling to figure out how to reach Millennials (even if you are a Millennial), take heart – there’s (already) another generational cohort entering the workforce.

This new cohort is called Generation Z (at one point, Millennials were referred to as Gen Y, so…) – they are, generally speaking, children of Gen X – born in the mid-1990s, and separated from Millennials by their lack of a memory of 9/11.

Gen Z is, in fact, already entering the workforce – and, according to the U.S. Census Bureau, they currently comprise a quarter of the population. They are seen as being more “realistic” when it comes to life and working than Millennials, who have been characterized as more “optimistic.” Gen Z is said to be more independent and competitive in their work than the collaborative Millennials, more concerned with privacy (Snapchat versus Facebook), and are said to have a preference for communicating face-to-face. It’s said they’ll eschew racking up big college debt, and are said to be interested in multiple roles within a single employer, rather than multiple employers (role-hoppers versus job-hoppers). They have been called a generation of self-starters, self-learners and self-motivators – and they’ve never known a world without the Internet and a smartphone to bring it to their fingertips wherever they are.

Unlike previous generations, whose parents didn’t mention money or focus on financial topics with their kids, more than half (56%) of Gen Z have reportedly discussed saving money with their parents in the past six months. The result, according to researchers, is a young generation that “behaves more like Baby Boomers than Millennials,” is making plans to work during college, to avoid personal debt at all costs, and… to save for retirement. Indeed, 12% of Gen Z is already saving for retirement, according to a recent research report.

Behavior ‘Patterns’

Now, as different as individuals in various generational cohorts can be, I’ve never been inclined to assign those behavioral differences to their membership in any particular cohort. Rather, I think there are things that younger workers are inclined to do (or not do) that workers in every cohort were inclined to do (or avoid) when they were younger. Do Millennials change jobs more frequently than their elders? Sure. But they didn’t invent the phenomenon; for a variety of reasons, younger workers have long been more inclined (or able) to pull up stakes and seek new opportunities (American private sector job tenure has actually been remarkably and consistently “short” running all the way back to WWII). Similarly, younger workers tend to put off saving (certainly for something as far away and obscure in concept as retirement), and when they do start saving, tend to save less than their elders. This was true of the Boomers, of Gen X and Millennials, and – despite their more rapid savings start – will almost certainly be true of Gen Z, left to their own devices.

That last part is a potentially critical difference, of course, in that today plan design differences like automatic enrollment were a relative rarity when the Boomers were coming into the workplace. Some of it is that – at least supposedly – their parents didn’t need to save because they had defined benefit pension plans to secure their retirement. But, even for those who were covered by those plans (and most weren’t) – the DB promise was of little value at a time when 10-year cliff vesting and 8-year workplace tenures were the order of the day. Moreover, Boomers would typically have had to wait a year to start contributing to their DC plan when they entered the workforce.

Headlines tout today’s improved behaviors – more diversified investments, an earlier savings start, a greater awareness of the need to prepare for retirement – as evidence of refined education efforts, or a heightened awareness of the need to save by generations who are more attuned to financial realities. Those are indeed welcome and encouraging signs.

Still, it seems to me that many in these newer generational cohorts are – as are their elders – really the beneficiaries of innovative plan designs – things like target-date funds, as well as automatic enrollment and contribution acceleration, and a heightened focus on outcomes – developed to overcome the behavioral shortcomings of human beings – regardless of their generational cohort.

- Nevin E. Adams, JD

When You Assume...

The use of assumptions was the focus of a recent report from the Employee Benefit Research Institute (EBRI), which not only highlighted the assumptions used in two separate retirement studies, but illustrated a real problem with their results.

The EBRI report examined two earlier  studies — one by Pew Trusts, the other by the Center for Retirement Research at Boston College — that purported to show that the retirement prospects for Gen Xers were worse than those of the Baby Boomers. The EBRI report not only highlighted the questionable assumptions, but took the time to quantify the impact (see “EBRI Report Calls Out Pew, CRR on Retirement Conclusions”). Such public criticisms are a rarity, as evidenced by the media coverage accompanying the release of the EBRI report.

As recently as a few years ago, I would have assumed that findings published by credentialed individuals associated with a reputable institution of higher learning could be taken at face value, if only because I assumed that if their methodologies were flawed, their findings would be taken to task by other similarly credentialed individuals.
Sadly, that does not seem to be the case.

The Pew report, though it went to some pains to determine appropriate rates of return to project out the future balances of both Boomers and Gen Xers, chose to completely ignore any future contributions.  Not so big a deal for those on the cusp of retirement perhaps, but what about those Gen Xers (defined as those Individuals born between 1965 and 1974) who are (just) 40? That’s at least a quarter century of contributions — and earnings on those contributions — completely disregarded by the Pew assumptions. Think that might tend to produce a lower retirement readiness conclusion about that demographic?

As for the report by CRR, the EBRI report explains how it relies on “wealth-to-income patterns by age group from the 1983–2010 Federal Reserve Surveys of Consumer Finances (SCF).” That certainly sounds like a credible source, but it also happens to be based on self-reported information and a perspective of 401(k)-plan designs and savings trends that pre-date the impact of automatic enrollment plan features that followed the passage of the Pension Protection Act of 2006. Not that you’ll find that acknowledged in the report, even in the footnotes. And yet data from the CRR’s NRRI are routinely cited in industry reports.

Projections about the future inevitably require some assumptions, and the EBRI report does as well. But it not only lays out its assumptions in great detail, it provides a wide range of findings associated with those various assumptions so that readers can draw their own conclusions based on the scenario(s) they think most likely to occur.

There’s an old adage that points out the inherent dangers in relying overly much on assumptions. It cautions that one should “never assume, because when you assume, you make an ‘ass’ of ‘u’ and ‘me.’”

That goes double for those who blindly rely on research findings drawn from assumptions poorly constructed and/or undisclosed.

Nevin E. Adams, JD

• See an earlier analysis of the Pew Trust report here.

• You can find a more comprehensive explanation of some of the issues associated with the CRR’s NRRI here.