5 Ways to Improve America’s Retirement Savings

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. The retirement outlook looks brighter for some and dimmer for others. How do you feel about yours? The Employment Retirement Income Security Act, known as Erisa, turns 50 years old this year. The landmark law offers protection for people with workplace plans, but some believe the system is broken. So what would it take to repair it? Mark Miller is the author of Retirement Reboot and publisher of the Retirement Revised newsletter. Thanks for joining me, Mark.

Mark Miller: Hi, Ivanna. Thanks for having me.

Why the Employment Retirement Income Security Act Has Been Successful

Hampton: Let’s start with why Erisa was created and has the law been successful.

Miller: Yeah, Erisa was passed into law in 1974, actually, Labor Day weekend. Initially, it was a response to abuses that had been going on in the defined-benefit pension space in the private sector, some really high-profile crashes and burns of pension plans that prompted Congress to pass Erisa, which really, for the first time, kind of tightened up regulation and oversight of employer-provided pensions. And back in that time, this was before things like 401(k)s and IRAs were around, so it really was the world of defined-benefit pensions. But it’s been very successful in the sense that employer-sponsored retirement plans are a lot safer as a result of Erisa. But the increased regulation also, many believe, helped set the stage for sort of the decline of the traditional pension as more employers decided that the expense and regulation perhaps wasn’t worth it. So, this kind of massive shift that we’ve seen over the years away from traditional pensions and toward the 401(k) defined-contribution system, some point to Erisa. And not in the sense of, well, this was a bad idea, but just as sort of an unintended consequence that happened. And then we just thought that for this article that I did for The New York Times about this, that it’d be interesting to use the anniversary, the 50th anniversary of the passage of Erisa to sort of take stock of where things are 50 years down the road.

How Well Workers from Upper, Middle, and Lower Incomes Are Saving for Retirement

Hampton: Let’s take stock of how workers are doing. How are workers from upper, middle, and lower incomes faring when saving for retirement?

Miller: What we see in the numbers is that most of the savings are accumulating at the higher end of incomes. And so there’s a variety of reasons for that. One of which is that 401(k)s just are not as widely available as they should be. In this article, we surveyed a variety of experts to get their suggestions on ways to make the system better in the next 50 years. And one of the main things that really people point to is the need to make 401(k) coverage much more universal than it is now. Only about half of American workers have access to a workplace retirement savings plan at any given time. Oftentimes what you see is that people move in and out of coverage as they move through their careers. And so there are several ways that could be done. And we explore some of those ideas in the article. But the starting point is to make these things accessible to more workers.

Retirement Savings by Race and Ethnicity

Hampton: And how does that break down by race and ethnicity?

Miller: The people least likely to have access to workplace plans are Black and Latino households and lower income. Who tend to more often than not work for smaller businesses that are less likely to have plans. So, from a public policy standpoint, several different ideas are out there for addressing that. Seventeen states now have passed legislation creating what are so-called auto-IRA programs, and eight states have launched them. And these are basically IRA accounts that employers must connect their workers to if they don’t offer their own plan. That’s one way of addressing it, to create much more universal coverage. Others have proposed a more of a national version of an auto-IRA plan. Some have even gone further to say that what we really need is a federally sponsored 401(k) offering where you would participate in a federal program that would have a matching contribution. Again, in any case where you work for an employer that is not offering their own plan. But, you know, the vision here would be to make retirement saving as universal as Social Security is, which I think is actually quite an exciting idea.

How to Improve Retirement Savings

Hampton: In the article, you mentioned earlier, you’ve written about five ways how the country, employers could improve retirement savings. Let’s go one by one. Talk about what would it take to expand 401(k) coverage.

Miller: So, 401(k) coverage could be expanded through the state auto-IRA idea that I mentioned, or through a more national version of that, or a national 401(k) plan. The second idea we explore is the idea of making the 401(k) offerings that we already have a little bit more like pensions. And that means, one of the really the best parts about the defined-benefit pension system is that those are automatic, when you go to work for an employer, you’re signed up, you’re participating, you don’t really have to do much. Making 401(k)s more automatic like that through automatic enrollment, for example, and automatic enrollment has been adopted very widely by large 401(k) plans, less so by smaller ones, but it’s boosted participation and saving rates significantly. Another way to make 401(k)s more like pensions is to automate the investment more. So, we see that in things like target-date funds, which automatically rebalance your accounts. But there could be other ways to do that, adding more personalized investment advice. More opportunities to convert your nest egg to guaranteed income streams when you retire. That’s one of the other ideas that people point to is to try to make the 401(k) act a little bit more like a pension does from an automation standpoint.

How do we make this system more equitable? You know, the tax deferrals that people get for these accounts are costly. They cost the federal government almost $190 billion annually in lost tax revenue. So, it’s an important question to think about how we want to use those resources. And about 60% of the value of that deferral is going to the top one fifth of households. So, how do we find ways to move those resources more into the middle class and into lower-income households? One research study that I discussed in the paper argues that higher-income households would be saving anyway, even without the tax deferral. So we should try to use those resources more to support middle and lower-income households. And this study suggests that use those tax-deferral resources to fund and expand Social Security, for example, which is our universal retirement benefit. You know, use the resources we’re spending now on the higher-income households to support lower. And then the last idea is, in fact, to expand Social Security. That’s the lever we have available to us that can most quickly benefit the largest number of households if we could kind of unlock that from a political standpoint. Those are some of the ideas that were discussed in the article.

Improving Social Security

Hampton: Let’s talk about Social Security. Let’s get into what has been pitched as to making it more accessible or improving Social Security.

Miller: Various proposals are out there. Democrats have proposed an across-the-board increase of about 2% in benefits plus targeted increases for lower-income households. At the same time that you would take steps to deal with the looming question about Social Security, which is what happens when we get to the year 2035 when the trust fund resources are exhausted. And that’s when people talk about the solvency question for Social Security. And if we were to reach that point, we’d be looking at a roughly 20% across-the-board cut in Social Security benefits. So, reform proposals generally focus on number one, raising enough revenue to avert that kind of cliff in Social Security that’s looming out there about a decade away from now. And number two, how to expand benefits. And there are a number of ways you can fund that. That’s going to be part of the political process. But the general idea is to try to make benefits more robust and also number three to keep and to protect what’s already there.

Would a National Retirement Savings Plan Replace Current Employer Plans?

Hampton: And you mentioned earlier a national government plan. Could current workplace plans decrease or disappear if something like that emerges?

Miller: That’s one of the concerns or worries that gets voiced about that idea, that it would be an incentive for employers to drop their own plans and just move workers into the federal plan. I think that’s a debatable concern. Especially at a time when the demand for workers is high, the competition for talent is high. My guess is that particularly large employers would continue to offer their own benefits, which could be richer than the federal plan likely would be, as a way to attract and retain workers. I suspect that what would happen here is that the biggest benefit of a national plan like that would be to create coverage for a much wider swath of the workforce that is just going uncovered now. And it’s something I think about a lot is how do we come up with solutions to these issues that operate at scale? You want to do things that are going to have substantial impact. Some of these ideas, for example, the auto IRA, this is something that has been batted around for, well, 15 years or so now. And it’s been this very incremental, painful, slow progress where initially it was proposed that we’d create this national auto-IRA program. It didn’t get passed. The states have been doing it. It’s slow getting it off the ground. People need help and they need it now. So, I think the most attractive part of the national 401(k) idea would be to get something passed that could quickly provide access to a very large number of workers who are uncovered now.

Do Investors Need Fiduciary Protections like Erisa Extended to IRAs?

Hampton: Speaking of IRAs, Erisa requires employers to put their employees’ interests first, but the law doesn’t cover IRAs. A new fiduciary rule would, but federal courts have blocked it from going into effect in September. What do you think about the rule and efforts to stop it?

Miller: This falls under this category of better advice that we were talking about earlier, which is one of the key ideas discussed in the Times article. The issue here is if you’re getting conflicting advice about rollovers. So, most of the money that’s in IRAs is rolled over from 401(k) accounts. And what that Department of Labor rule is attempting to address, and DOL has been trying to deal with this now for many years but as you mentioned, it’s been locked up in the courts. Is the question of making sure that when people are getting advice from people who call themselves advisors at the point of rollover are getting nonconflicted advice that is fiduciary, in other words, that is guaranteed to be in the best interest of that saver. I’ve felt for a long time that we do need that fiduciary protection extended to advice given on IRA rollovers. And that’s really at the heart of this fight.

What’s at Stake for Future Retirees

Hampton: And Erisa helped reshape saving for retirement. What do you think is at stake in the next 50 years if we don’t see the changes that your article proposed?

Miller: We’ll continue to see people arriving at retirement with meager or no retirement savings. When I say people, we’re talking about, of course, not the entire population of retirees. But roughly, depending on whose numbers you believe, you know, a third to 40% of households are going to be doing just fine in retirement. They’ve saved, they’ve been able to save. They’re also households that likely are going to have high Social Security payments. These are higher-income households that have had high wages. Therefore, they’re going to have higher Social Security benefits. They’re going to do fine in retirement. The question is how do we unlock this question of the combination of Social Security plus savings for that other roughly two thirds of households? And so, you know, we do need to make these changes so that we can ensure better retirement for that two thirds.

Hampton: Well, Mark, thank you for your time today and your insight.

Miller: Ivanna, thank you. Always a pleasure.

Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake Vankersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.