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The Status Quo Is Not Acceptable

“It’s not just about a decision to save, it’s about saving more.” NAPA Executive Director/CEO Brian Graff captured the heart of the discussion over retirement readiness at a March 25 session of the NAPA 401(k) Summit in New Orleans. Graff debated Teresa Ghilarducci, Chair of Economic Policy Analysis and Director of the Schwartz Center for Economic Analysis at the New School — and well-known critic of the 401(k) system.

Ghilarducci took issue with the degree to which individuals in the United States have responsibility for their retirement compared with citizens in other advanced economies. She said the 401(k) system “has been mostly a failure,” an experiment she believes has gone wrong for the middle class. “You’re blaming the drought on the well,” countered Graff, observing that the real problem with the 401(k) system is that not enough people have access to a workplace retirement plan.

Ghilarducci backpedaled somewhat, saying later that putting “5% in 401(k)s is fine” and that she does not want to “blow up” the 401(k) system. But she still contended that the system could be more progressive. Graff countered with statistics showing that the way the tax code governs 401(k)s really is more progressive than the media and some politicians commonly portray.

But there is more to the problem than 401(k)s themselves, according to Ghilarducci. She contends that even if accountholders have done everything right, many of them have “no clue how to handle their funds.”

Graff addressed that contention, assuring her that NAPA members do a great deal to educate their clients and contribute to a better understanding of investing among participants. And he invited her to meet with NAPA members about what they do in that regard.

Graff and Ghilarducci shared a conviction that the recent finding by the Employee Benefit Research Institute that a large percentage of the population has saved very little is, as Graff put it, “very significant.” How to address that, however, engendered lively debate. Ghilarducci is a strong proponent of mandates to increase saving rates and retirement plan participation. She argued that the government should mandate that individuals save 5% of their income for retirement “because people should not have to decide with each paycheck whether to save.”

Graff did not join her in supporting such a mandate. “Part of the challenge,” he said, “is getting people covered by a workplace plan.” Graff noted there may be room for exploring different policy. “It may be that the only way we move the needle is to require employers to do something. But what is that something?” He and Ghilarducci found common ground in an idea that may be worth exploring: a “soft mandate” that would require employers to provide employees with access to a retirement plan.

But Graff reiterated his support for a voluntary system, asking Ghilarducci if it wasn’t a good idea to focus tax benefits in a way that would encourage those with lower incomes to save more. “There is no incentive in the tax system for those not paying income tax” to participate in a 401(k), he said. He suggested that a refundable savers’ credit would help address that, an idea with which Ghilarducci agreed.

They also shared concern over hardship distributions and the effect they have on retirement accounts and retirement readiness. Ghilarducci said that “way too many hardship distributions are allowed.” Graff remarked that “Congress has a hard time saying ‘no’ with regard to waiving rules on retirement plan distributions for hardships in special cases.”

Look for information about a video of their discussion soon.

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