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.
- Nevin E. Adams, JD
[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…
