Retirement industry leaders appearing at a Capitol Hill event in late September 2017 generally agreed that building on the existing system would dramatically improve the retirement readiness of Americans throughout the country.
In what turned out to be coincidental timing, the Financial Services Roundtable hosted a policy forum on America’s retirement challenges on Sept. 27, 2017 — the same day President Trump and key congressional leaders released a framework for reforming the tax code.
The forum’s central focus was on the policy prescriptions described in the book, From Here to Security: How Workplace Savings Can Keep America’s Promise, by Robert Reynolds, CEO of Great-West Financial and Putnam Investments.
But the elephant in the room appeared to be whether the forthcoming tax reform framework would include a full or partial version of the so-called “Rothification” proposal for DC plans to help offset tax cuts (which, as it turns out, currently does not).
Reynolds was quick to address the issue of Rothification, calling on Congress to act in the best interest of American workers, saying that, “A cut to retirement savings incentives in order to ‘pay for’ unrelated tax cuts would be a serious policy mistake.”
‘From Here to Security’
Reynolds went on to explain how “the retirement savings challenge is real and dead serious for millions of Americans,” noting that Social Security is facing a shortfall and one third of Americans have nothing saved. As described in his book, Reynolds argues that the country has a robust public and private system in place to build on and he believes the goal of retirement security for all Americans is achievable if the country has the will to act.
“More than a decade after the landmark Pension Protection Act of 2006, the evidence is in and it is unequivocal — plan designs that include automatic enrollment, automatic savings escalation to levels of 10% or more, plus guidance to age-based investment strategies, like lifecycle or balance funds, are right now bringing tens of millions of American workers to full retirement readiness,” Reynolds told the audience.
He pointed to data from a 2016 Empower Retirement Lifetime Income Study showing how access and plan design features are major factors in determining future retirement readiness. Reynolds noted that the most powerful single variable is access to a workplace retirement plan, with the data showing that workers who have no access to a payroll savings plan stand to replace just 44% of their career incomes, but having access to a workplace plan nearly doubles replacement income to 79%.
Perhaps even more remarkable is how other plan design elements drive the replacement rate even higher:
- Working with a paid advisor: 87%
‘Workplace 4.0’ Plan
- Deferring 10% or more of salary: 117%
To help “finish the job the PPA did,” Reynolds described a policy proposal in his book for a “Workplace 4.0” retirement savings plan that would, among other things, extend access to payroll deduction savings to as many workers as possible, require auto-plan design features across all workplace plans while also strengthening legal safe harbors, and establish an industry-norm savings rate in the workplace system to 10% or more.
Under modeling performed by EBRI, Reynolds noted that implementing these changes could increase annual retirement savings in America by $700 billion a year within three years. EBRI’s analysis further shows that $5.5 trillion in potential added growth in retirement assets from the Workplace 4.0 reforms could be added by 2025, and it would reduce retirement savings shortfalls by nearly half for everyone up to age 55.
Reynolds also explained how retirement reforms would have a powerful impact on capital markets and economic growth. “Personal solvency and national solvency actually reinforce each other. It follows that any policy move that increases savings will also likely increase growth. Any policy moves that reduce or inhibit savings may slow future growth,” Reynolds concluded.A Challenge or a Crisis?
Turning to a panel discussion on America’s retirement savings challenges, panelists weighed in on a number of retirement policy issues and offered opinions on what they believe is the best way to expand access to workplace savings.
In addition to Reynolds, the panelists included:
- Mark Iwry, Nonresident Senior Fellow at the Brookings Institutions and former Treasury Deputy Assistant Secretary for Retirement and Health Policy;
- Chad Brown, Vice President, Managing Director of Large and Mega Market Retirement Distribution with Transamerica;
- Harry Conaway, President and CEO of the Employee Benefit Research Institute; and
- James Pethokoukis, DeWitt Wallace Fellow at the American Enterprise Institute.
Moderator Jill Hoffman of the Financial Services Roundtable opened the discussion with a question about whether there really is a retirement “crisis” in the country, as many reports suggest. All of the panelists generally agreed that the word “crisis” is somewhat strong and that “challenge” is perhaps a more appropriate characterization.
Noting that the debate needs to move past the semantics, Iwry explained that the country does face a “chronic condition” of under saving, adding that “we know what to do to fix the problem and the solutions are laid out in Bob’s book.”
Brown agreed that people are not saving at the level they need to be, but he pointed out that there is an ongoing challenge of “health and wealth” where people are not saving at all or they are diverting their savings because they have to deal with a major health care issue.
When asked about expanding access to workplace savings, many of the suggestions repeatedly came back to the recommendations in Reynolds’ book. Expanding access to multiple employer plans for unrelated employers, implementing plan design changes and establishing access to automatic payroll savings plans were recommended as potential solutions that would greatly help small businesses — the bulk of which do not offer retirement plans.
Discussing the benefits of access to workplace savings plans, Conaway explained that overall savings rates are higher in the workplace setting and the likelihood of success is even greater, even though the tax incentives are equivalent between the workplace and individual IRA levels. The difference, Conaway noted, is that the individual has the responsibility in a stand-alone IRA setting, whereas in a workplace setting, the employer takes care of the administrative responsibility. Moreover, he explained that in a stand-alone IRA setting, there are no additional design aspects that encourage savings, such as auto-enrolment, auto-escalation and employer matches.Rothification
As the panel discussion was getting underway, the tax reform framework had not yet been publicly released, so speculation and discussion concerning Rothification loomed large among the panelists and audience. All of the panelists generally expressed concern (or acknowledged that there is concern) about the possibility of Rothification — some more forcefully than others.
Emphasizing the importance of being allowed to contribute to a plan on a pre-tax basis, Reynolds argued that he believes a move to Rothification in the DC world would result in reduced contributions and participation, and it would hit the very people who are most in need of saving.
Brown also expressed concern with Rothification, noting that he would rather have the power of choice between a pre- and post-tax basis, and would be more inclined to support enhanced auto provisions, such as increasing the safe harbor deferral rate from 3% to 6%.
Looking at it from an economic perspective, Pethokoukis contended that Rothification scores very poorly on a dynamic basis for economic growth, suggesting that policymakers need to be cognizant of the long-term effects on the economy and not just consider the short-term revenue effects for budgetary scorekeeping.
Meanwhile, Conaway announced that EBRI would soon be coming out with the results of a survey and study on Rothification under different scenarios, such as combining Rothification with an enhanced Saver’s credit and higher contribution limits.