With all the debate and attention by the press on 401(k)s, much of which has been negative lately, four senior policy and industry people debated the issues at NAPA’s 401(k) Summit in Las Vegas.
Moderated by Brian Graff, NAPA’s CEO/Executive Director, the panel included Merrill Lynch’s Kevin Crain, ASPPA’s Judy Miller and the Pension Rights Center’s Karen Friedman.
While 401(k)s have become ubiquitous in our society and have garnered over $3 trillion in assets, the bright light shining on 401(k)s does show some of its blemishes, raising the question of whether we should create a whole new system or try to improve the one we have.
Crain suggested that we have been on a journey over the past 10 years in a system that has become characterized by “democratic paternalism” – democratic because participants still have to make their own decisions, but turning paternalistic with the evolution of auto enrollment and escalation. For example, auto enrollment is now being applied to non-participating employees, he noted. This approach, in combination with investment advice, increases average deferrals by almost $2,500 per year, Crain said. Even Freidman, a prominent critic of the system, admitted 401(k)s are attractive and popular because of payroll deduction, portability and transparency. In addition, Graff noted, plans and participants enjoy economies of scale, lowering the cost of service and investment products.
Responding to criticism that average and median account balances are too low, Miller noted that many participants keep old accounts when they leave their jobs, skewing the numbers. Noting that the system doesn’t cover the part-time workforce, statistics purporting to show that overall coverage is low are wrong when applied to full-time workers.
Friedman, who endorses Sen. Tom Harkin’s USA Retirement Fund proposal, pointed out the weaknesses in the current system, including:
• Low participation and deferral rates
• Participant lack of investment savvy
• Leakage
• How people can make their savings last
• Higher income workers enjoy a greater percentage of the tax subsidy
So how do we improve the system? There was much discussion about the emerging state-run MEPs, especially California’s plan, which seem to be garnering the interest of many states and has been on Treasury’s agenda for a while, in the form of their auto IRA proposal.
Surprisingly, there was consensus among the panel that these schemes, especially the one under study in California (which would require all employers with more than five workers to offer a plan), are beneficial as long as providers are allowed to compete for the business with the states. The question was raised whether the Feds will step in to create a uniform system if many states adopt MEPs, and Graff cautioned that any mandatory funding requirements by employers will likely meet resistance.
Friedman advocated for universal coverage, more responsibility shared by the employer, pooling risk among investors and allowing states to allow private workers to leverage the efficiencies and scale of their retirement systems. Crain advocated that enrollment in retirement plans should mirror health plans, and that personalized advice should be expanded to everyone at a low cost or even for free. Everyone agreed that offering some sort of retirement income product would be helpful and that translating participant account balances into streams of income would be a good start.
So is 401(k) a failed experiment or just an example of an industry evolving and maturing? Are 401(k)s like teenagers -- with many blemishes and sometimes hard to love -- or do we need to go back to the drawing board and create a whole new system? Share your own answer in the comment box below.
