The United States is not necessarily experiencing a retirement crisis – but legislators, employers and advisors can do a number of things to help shore up the country’s retirement system.
In “Agreeing to Disagree on How to Build a Better Retirement,” three panelists debated the potential crisis and retirement proposals – many of which are already on the table in Congress, state legislatures and executive agencies – at the 2019 Morningstar Investment Conference on Thursday in Chicago.
Stephen Wendel, Morningstar’s head of behavioral science, said we’ve created a crisis of expectations.
“As a society we’ve decided that older Americans should have a retirement and live comfortably without a significant income drop, but that’s not going to happen for a significant portion of the population,” said Wendel. “Either we need to follow through on our commitments as a society, or we need to change those expectations.”
An informal live poll of the advisors attending the session found that 89 percent believed there was a retirement crisis, versus 11 percent who did not.
But David Blanchett, Morningstar head of retirement research, framed the problem differently – America has a savings crisis, not a retirement crisis, he said.
“If you look at retirees, they’re a very happy bunch,” said Blanchett. “95 percent describe themselves as happy. Half think that there’s a retirement crisis, but no one really describes their own situation as a crisis.”
While it’s true that most Americans will experience a shortfall in retirement because they’re not saving enough, people usually find ways to make things work, said Blanchett.
Wendel retorted that the question of a retirement crisis shouldn’t be around whether people can adapt, it should be around whether they are required to adapt so that they don’t outlive their assets.
Daniel Bruns, Morningstar vice president of product strategy, said that an effective social safety net has helped stave off a more serious retirement problem, but demographic changes have strained those.
“Life expectancies have increased; we’ve gone from people living from five to 10 years in retirement to now where people expect to live 25, 30, 35 years in retirement,” said Bruns. “They’re working for as long as they’re going to be retired. You can’t save 3, 4, or 5 percent each year and expect to live for 35 years on that.”
Bruns said that people will likely have longer careers, or work multiple careers, to address the longevity issue.
But Wendel pointed out that many Americans are retiring earlier than they expected.
“People are retiring earlier than they had planned; we believe it is because they are not healthy enough,” said Wendel. “People like those in this room, who are relatively well off compared to the average, could keep working. For the vast majority, that’s not true.”
The panelists – and attendees – were then asked about the efficacy of auto-enrollment in defined contribution plans as a tool to combat the retirement shortfall. While attendees were positive about the impact of autoenrollent, the panelists were split.
According to Blanchett, the plan participation rate has increased from 75 percent to 95 percent, but the savings rate in retirement plans has been very slow to increase.
“My concern is where we need to be is not where we are today,” sayid Blanchett. “To have an impact, the savings rate needs to go from 6 percent to 12 percent – which could happen at some point, but hasn’t happened yet.”
Blanchett said that some retirement experts have floated a proposal to have periodic auto-enrollment for plan participants – where at regular intervals, all participants would be auto-enrolled at an escalating contribution to a default alternative investment unless tey opt out.
“A 3 percent default contribution, even with a 1 to 2 percent escalation, doesn’t get you there,” said Blanchett. “Defaults can have a meaningful impact, but those having problems around saving haven’t gotten the impact that they need.”
Using Home Equity Controversial
More controversial is the potential of home equity to act as a retirement asset, or, at the very least, a backstop for those barely living within their savings.
According to Blanchett, only 12 percent of retirees end up using their home equity to help cover their expenses.
“I think home equity can be considered part of a retirement portfolio,” said Blanchett. “The way I view it, home equity is mostly an asset of last resort.”
While the panelists believed that mandatory, government-sponsored savings plans for workers should be considered by legislators, they didn’t think that they would be workable solutions to the problem surrounding saving and retirement.
Mandating employers to save on behalf of their employees is a more likely solution, said Wendel.
The panelists also supported raising the tax-deferred and tax-exempt savings levels in retirement plans, IRAs and Roth accounts, but Wendel warned about the unintended consequences of such a move.
“It will impoverish the U.S. government and end up having people make less from their Social Security,” said Wendel.
401(k) Changes
The panelists, Blanchett in particular, also approved of proposals to allow plan participants to convert part of their savings into an annuity in retirement. Doing so would not only provide a tax-advantaged way to convert savings into income, but it would also help solve a secondary problem in retirement – namely, that many retirees are hoarding their savings and living well below their means rather than spending down some of their savings.
“We think of retirement as a certain path of expenditure over time, but they’re not using the assets as we think,” said Blanchett. “We think we’re pushing people to save for retirement to follow some path or spending curve, but that’s not what the research is showing. People are holding onto the money.”
People hold onto their assets in part because they fear a major expense, like a health-care crisis, in their retirement years, said Blanchett.
While each of the panelists expressed some support for capping plan expenses, they also wondered whether it would be possible.
“In my mind, so many things go into plan expenses that it’s hard to quantify them,” said Bruns. “I think free enterprise is going to prevail – you should be shopping around if you want all of the options that would make the total cost of a plan under 180 basis points.”
Smaller plans would also be more likely to have difficulty meeting any proposed cap on plan expenses, said Wendel.
The panelists were not excited about the prospect of open-architecture 401(k) plans where participants could invest in whatever they wanted, like in an IRA.
“There should be guardrails because people are crazy,” said Blanchett. “I want it hard for them to make bad decisions.”