Change can be difficult, but it also can mark progress, especially in the world of defined contribution plans. Participants have access to a multitude of tools and benefits — from automatic enrollment to target-date investment strategies — to help keep their retirement planning on track.
Identifying how change will happen in the DC industry is my focus as the head of State Street Global Advisors’ public policy initiative. What’s on the horizon in the next five to 10 years for the DC plan world and policymakers to address?
Three issues have received much attention from policymakers, and are of critical importance: getting people enrolled, making sure they are saving enough and helping them protect their savings. We believe a fourth issue — lifetime income — merits sustained focus as well.
Access and coverage. Many employees — particularly at small companies — don’t have access to an employer-sponsored retirement plan. This is a challenge that the DC industry is working to solve: Improving access and coverage is central to improving our country’s looming retirement issues.
Savings adequacy. Tools such as auto-enrollment have meant that many employees who wouldn’t have started saving for retirement are now making regular contributions. But many people simply aren’t saving enough. Auto-escalation can help by making sure that employees’ contribution rates increase periodically. More DC plans are adopting this tool — and that’s good news for participants.
Leakage. Billions of dollars in retirement savings are lost each year when money is withdrawn from DC plans before retirement. This leakage often occurs when employees change jobs, because of strict rules around plan-to-plan transfers. Although the Treasury Department has issued helpful guidance in this area, more can be done to make it easier for employees to keep their savings in a previous plan or safely move them to a new employer’s plan.
The issues above have already spurred policy discussions and changes in the DC industry. But another major question remains: How can participants make sure that their savings will last as long as their retirement does? The need for retirement income solutions in DC plans has become more urgent. The decline of defined benefit plans has left DC participants bearing much of the responsibility of managing their savings to last through retirement.
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Fortunately, action by the Departments of Labor and Treasury supports the integration of guaranteed income products into DC plans. We believe plan sponsors should take advantage of the guidance issued by these Departments last October and begin working to incorporate retirement income products into their plans.
We also need to educate employees about the real meaning of retirement savings. After all, successful retirement planning isn’t just about hitting a magic number at age 65. Instead, planning should be more focused on helping employees frame their savings efforts around generating an appropriate level of income throughout retirement.
One proposal that policymakers are considering would provide participants with lifetime income illustrations on their DC account statements. Such an illustration would help educate participants by not only showing an account balance, but also how much income those savings could theoretically generate over the rest of the participant’s life if invested in a lifetime income product such as an annuity.
As policymakers continue to take interest in the retirement security of American workers, we believe we have an obligation to participate in the policymaking process. We are seeing positive momentum in Washington and are committed to moving our industry forward and building a better retirement for future participants.
Kahn is managing director and retirement policy strategist at State Street Global Advisors.
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