State-Sponsored Individual Retirement Plans: An Emerging Solution to the Retirement Crisis
Interview with Teresa Ghilarducci
Teresa Ghilarducci is a labor economist and nationally-recognized expert on retirement security issues, the Director of the Schwartz Center for Economic Policy Analysis at the New School, and the author of many publications including When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them. We asked for her thoughts on the emerging trend of states providing vehicles for workers to save for retirement.
You write and speak often about the crisis in America's retirement system. Describe your views on that crisis and how it is leading to new retirement legislation in the states.
Surely we all know that traditional pensions have almost disappeared from the private workforce, and that debt levels are high and personal savings are low. But two related issues need more attention: The promotion by policy makers and regulators of the handy 401(k)-type plan is a fundamental failure. And, over the last ten years a smaller and smaller share of the workforce participates in a retirement account of any kind, whether a defined benefit or a 401(k) type defined contribution plan.
In fact, for the first time since World War II, the share of American workers covered by any retirement account or pension plan at work fell significantly and steadily: from 61% in 2001 to 53% in 2012. Retirement account sponsorship also fell between 2001 and 2012.
Ironically, this decline occurred when the demand for retirement accounts by American workers should have increased. Why should the demand have increased? Because the workforce is older, and more people are getting to the age when they panic about retirement. Also, the marketing of tax-favored defined contribution plans has been intense, and Congress has shelled out tax breaks. The increase in the tax expenditures for 401(k)s far exceeded that for defined benefit plans, soaring to $67 billion per year in 2010. These factors should have increased retirement account coverage, especially in 401(k) type plans.
But there is increasing evidence that when people have a 401(k) they are fleeced by bad advice and high fees.1 People also invest their money in 401(k)s in precisely the wrong way: They sell stocks when the prices fall and buy them as they are rising.
Without further action, the transition to a 401(k)-based system will become a large-scale policy failure. We need to regulate 401(k) plans more substantially.
Most fundamentally, it is vital that all workers have a chance to save for retirement at work in a safe and secure account. People need easy ways to make steady contributions throughout their working lives. Though Congress has not acted, some states are moving ahead with their own efforts. In the absence of the federal government taking steps for individuals to accumulate employment savings, the states are stepping in to provide the vehicles that make such savings possible.
What are some examples of states addressing retirement insecurity, and how are they doing so?
Last fall, California took a big step forward with the passage of SB 1234, a bill to create the California Secure Choice Retirement Savings Program (CSC). The law puts into place a process so California can begin to address its retirement savings crisis.2
The CSC program is designed to create an account for all private sector workers in California who lack coverage through their workplace. This will give six million uncovered workers retirement coverage to supplement their Social Security benefits. Enrollment is automatic (although workers can choose to opt-out). Accounts are portable and not tied to specific employers, and administration is self-financing to minimize the state's liability. The state would invest the pooled funds in a conservative investment, with a guaranteed rate of return.
Several steps remain before the CSC is fully implemented, including a confirmation of the Plan's tax-qualified status and a ruling from the U.S. Department of Labor as to the Plan's exemption from ERISA. While amendments may be possible depending on implementation over the next several months, California has taken an important step toward establishing the first state-sponsored retirement plan.
California is the innovator. Legislators in a small but growing number of other states are following its lead. In Oregon, the lower chamber of the state's legislature just passed a bill to authorize a task force to consider whether Oregon should establish a similar program. Other states considering such bills include Maryland, Connecticut, and Illinois, and possibly New York as well.
What do you see as the role for regulation in state-sponsored retirement plans, considering that they are likely to be non-ERISA plans?
There will need to be ERISA-like protections for people's retirement savings. Fortunately, most states have such protections. Legislation at the state level can also make sure that accumulated savings are carefully protected and managed.
Are you optimistic or pessimistic about the future of retirement savings in our country?
I am optimistic that now is the time to work on retirement savings issues. The political, economic, historic, and legal drivers are all in place.
The political driver is that older voters are worried about retirement. National polls show that retirement is one of their top concerns.
The economic driver is that we are soon reaching the point where over 65 million people will be over 65. By 2030, it is anticipated that almost 1 out of every 5 Americans will be 65 years or older. They need something more than Social Security.
History is also a driver. Bold social policy is often made when there is the greatest need for experimentation. And historically, much of this experimentation comes at the state level. Social Security was first tried at the state level. Or consider Hawaii's requirement almost 40 years ago that employers provide health care benefits to employees who work 20 hours a week or more.
Legal drivers are also in place. More and more people are aware of the problems with employer sponsored 401(k)s: fraud, breach of fiduciary duty, excessive fees, bad advice, bad investment options, missing funds, and self-dealing, among others. Legal enforcement can only deal with these problems to some extent.
As people see the flaws in the current system, they are looking for alternatives, and states have the opportunity to help fill the gap.
Interview by Catha Worthman, Lewis, Feinberg, Lee, Renaker & Jackson, P.C.
1See recent PBS Frontline, The Retirement Gamble, http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
2For more details, see the New American Movement's Asset Building Program, California Secure Choice Retirement Savings Program: An Innovative Response to the Coming Retirement Security Crisis, http://www.retirementmadesimpler.org/Library/CAretirementFinal4.26.13.pdf.