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Workforce Changes Will Require New Retirement Policy Strategies

With many workers still lacking access to a retirement plan set against the backdrop of a growing gig economy, vital changes to existing retirement program strategies are needed, attendees at a May 8 policy forum in Washington, DC were told.

At the forum, “Defined Contribution: The Next Frontier,” Rep. Tim Walberg (R-MI) and Rep. Lisa Blunt Rochester (D-DE), along with two panels of plan sponsors, advisors and industry experts, addressed how best to prepare the retirement security system for tomorrow’s workforce.

A common theme echoing throughout Washington for the last several months are calls for enacting legislation to provide an annuity safe harbor for DC plans. Rep. Walberg, who is Chairman of the House Education and the Workforce’s Subcommittee on Health, Employment, Labor & Pensions, touted his legislation, the “Increasing Access to a Secure Retirement Act” (H.R. 4604) as a way to provide a fiduciary safe harbor for sponsors that may be hesitant to offer a lifetime income solution over litigation concerns.

Walberg said he got the idea for the legislation when he discovered that plan sponsors were not protected under the prudent-person standard if they were to provide a lifetime income annuity as part of their DC plan. He is optimistic the legislation will be approved this year as part of the Retirement Enhancement and Savings Act (RESA), which aims to expand retirement plan coverage and was introduced in the House in March.

Walberg acknowledged that there are some industry concerns with the lifetime disclosure provisions that are part of RESA, but added that he’s hoping to work through the issues to address any remaining concerns. Walberg also noted that Congress likely will hold further hearings on the legislation in the near future.

As a cosponsor, Rep. Blunt Rochester, who also serves on the House Education and the Workforce Committee, explained that she comes to the issue with concern over various reports suggesting that 35% to 50% of Americans don’t have access to workplace retirement plans. “With our bill, the goal was to provide employers with an additional tool and another product that employees could use. Annuities provide that tool to help those individuals who currently don’t have a retirement plan,” she explained. Blunt Rochester also noted that she believes enacting RESA is feasible this year, but it will important for both parties to keep an open dialogue and work towards constructive solutions.

Stakeholders Roundtable

Nevin E. Adams of the American Retirement moderated a panel discussion featuring Jack Towarnicky of the Plan Sponsor Council of America, Joshua Itzoe with Greenspring Advisors and Christine Correira of Bloomberg BNA on how plan sponsors and advisors are working together to address emerging workforce challenges with retirement savings.

According to Itzoe, the role of advisors is evolving and you can no longer just be a generalist. “As an industry, we came from the investment world, and historically 90% of what advisors did was thought of as investment experts. But what we are finding is that we have fewer competitors than we did 5 or 10 years ago, but they are a lot more specialized and it is getter harder to differentiate,” Itzoe noted.

To that end, he suggested that it’s critical to focus on higher-value areas and going beyond just investment conversations. While investment selection and monitoring has become a commodity, Itzoe noted, advisors also must be focused on benchmarking and helping to negotiate fees, helping committees stay accountable with best practices and challenging plan sponsors with “courageous” plan design.

As for plan design considerations, Towarnicky cited PSCA data showing that an increasing number of plan sponsors are becoming more innovative and aggressive with their designs, including starting with higher automatic defaults.

Towarnicky also explained that firms that have adopted automatic features are primarily focusing on new hires, but he believes that over the next 10 years they will reach further into their organizations, applying auto escalation and default enrollment for those who previously either declined to participate or set their contribution rate at a lower level. “One of the big advantages of automatic features is people have a tendency that, once they make an election, to not revisit their decisions, which is one of reasons when I was in a plan sponsor role that we defaulted employees every year,” he noted.

Towarnicky also believes that more plan sponsors will offer Roth options over the next 10 years and more participants will take up Roths once they learn more about the benefits. He explained that, since enactment of the Tax Cuts and Jobs Act, more Americans will pay significantly less or nothing in income taxes.

“I think you’ll see that once employers and plan sponsors figure this out, identifying this fact among their participants that are contributing to their 401(k), that they may want to add a Roth feature or may even change the default to a Roth,” Towarnicky explained.

Public Policy Initiatives

Diving deeper down into what can be done from a public policy perspective, Jan Jacobson with the American Benefits Council, Melissa Kahn with SSGA and David John with AARP agreed with many proposed fixes to improve retirement plan access, such as the open MEP provisions in RESA, but they diverged on the possibility of broader state solutions and employer mandates to provide access.

With the emerging gig economy and a changing workforce, Kahn believes the time has come for a uniform federal solution requiring employers to offer a plan, but exempts small employers and those that already offer coverage, like legislation introduced by Rep. Richie Neal (D-MA). “We have a lot of issues around the retirement system today — people aren’t saving enough, there’s leakage from the system, and people ask how they’re going to manage their money when they retire so it lasts as long as they live, but our view at State Street is that these aren’t issues unless you have access to a plan,” Kahn explained.

Kahn acknowledged the efforts by the states to address the access issue, but contended that a multi-state solution is not the right approach, particularly for large employers that have employees in several states.

Kahn also agreed that it’s critical to get the lifetime annuity bill “over the line,” explaining that participants also need help on the decumulation side to complement what plan sponsors have been doing on the accumulation side. She further noted that it will be important for plan sponsors to be comfortable with that approach.

For her part, Jacobson agreed that multi-state solutions are not the answer, but she does not agree with a federal employer mandate approach either, suggesting that the voluntary employer system has worked well and that mandates would be the proverbial “camel’s nose under the tent.” “Once you do a mandate, there’s nothing to stop Congress from saying that your plan must have these provisions,” Jacobson stated. Instead, she suggested, the open MEP provisions in RESA would be a good starting point for improving access.

AARP's David John, meanwhile, agreed with Jacobson that open MEPs are a good idea, but he contended that the concept “is not a magic bullet” and will not solve the broader access issues. Instead, he suggested that state plans may work better. “We started to address the issue of universal coverage a little over 12 years ago, but so far we’re still pretty much in the same place,” John stated in referring to the ongoing debate over a national solution. He further contended that the state plans operating now “serve a very valuable purpose as research labs” for approaches that he believes will work better.

The forum was hosted by Bloomberg BNA and State Street Global Advisors.