Interviewed by Joseph Coombs, Workplace Trends and Forecasting Specialist, SHRM
What do you see as the biggest problem for the future of retirement security in the United States?
I view the lack of access to employer-sponsored plans as the biggest problem for the future of retirement security in the United States. The overall coverage rate for employer-sponsored plans has never exceeded 50 percent in this country. Certainly there are challenges in trying to ensure that employees who participate in defined benefit or defined contribution plans accumulate sufficient benefits for a comfortable retirement. Market volatility and changes in contributions have increased the unpredictability of defined contribution plans. Even defined benefit plans have become volatile from the perspective of both employers and employees. Employers face unpredictability in their contribution obligations, and employees face the risk that their defined benefit plan will be frozen or terminated.
For the more than 50 percent of employees who do not have access to an employer-sponsored plan, the question they face is “how” to save for retirement, rather than “how much” they will be able to accumulate. Prior to the enactment of ERISA in 1974, pension plans in the U.S. were lightly regulated and the coverage rates were below 50 percent. ERISA arguably has been effective in addressing some of the fiduciary, plan funding and communications issues that existed prior to its implementation but the coverage rate has remained below 50 percent. More recently the transition has been from defined benefit to defined contribution plans, again without markedly increasing coverage.
Why is financial security in retirement important not just for the individual, but for the economy as a whole?
The answer is based in demographics. As the Baby Boomers age, it will take an increasingly large share of domestic expenditures to support those Boomers who did not build sufficient retirement assets through an employer-sponsored retirement plan or personal savings. Casting the discussion in terms of national expenditure can fail, however, to convey the human aspect of the economic issue. One way to personalize the issue for employees and employers is to consider that one in 10 employees currently has care-giving responsibility for both children and elders. If employees face the financial challenge of providing economic security to their aging parents, that will add to employee stress as well as the ability of those employees to accumulate assets for their own retirement. Those employees, as a result, have less discretionary income during their working years and lower levels of retirement savings for their own retirement. In short, the economic well being of a group as large as the Baby Boomers has implications for all of us.
What is the role of human resources in promoting retirement security?
Human resources departments play a critical role in promoting retirement security through their interface with two distinctly different groups. Human resources often has the responsibility to remind senior management and the board that employee benefits translates into benefits, not just costs, for the company. Human resources also reminds employees that the company’s retirement plans, while a current cost to those employees either directly or indirectly, will provide much needed benefits down the road. During times of financial crisis, these roles become even more difficult than usual because both company management and employees face exceptional short term financial challenges.
Going forward, what options do you see for smaller employers that have difficulty affording any form of retirement benefit for their employees?
I think it is possible that employers may become able to provide retirement benefits by withholding funds from employee paychecks, at the discretion of the employees, transmitting those funds to a private retirement account established by the employee, and having no other role in the accumulation or eventual payout of those retirement funds. That type of arrangement is probably the lowest cost and has the lowest legal risks for smaller employers in terms of providing an opportunity for their employees to save in a tax-advantaged account. Significant regulatory questions, including issues involving available investments, account administration, and pre-retirement access to the accounts, and whether employers would be required to participate, must be addressed before those types of programs become available.
What trends do you see for automatic enrollment of employees into retirement savings plans, and what kind of an impact would this have on retirement savings?
Every study I have seen shows that automatic enrollment features in retirement savings plans increase participation in those plans. Increased participation means increased retirement savings. The challenge now, in my view, is to make the regulatory requirements more flexible so that automatic enrollment features are attractive to more employers. For example, consider the position of an employer with high turnover in the first year of employment. Employees who stay for one year tend then to remain with the company for a longer period. The employer may be reluctant to automatically enroll all employees effective on the date they are first eligible to participate in the plan because that would result in large numbers of very small accounts. In addition, the longer term employees would effectively bear a higher level of administrative costs for their own accounts. The simple solution would be to permit the employer to automatically enroll employees when employees reach one year of service.