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Five Principles For Moving Beyond Employer Plans For Retirement Savings

Yesterday I wrote about the new Aspen Institute report on non-employer portable retirement plans and featured its proposals for entirely new ways of sponsoring retirement plans in order to enable access to retirement savings for people outside the traditional retirement plan system — contingent workers, the self-employed, and those working at companies small enough that the administrative expense of providing retirement plans is disproportionately high.

But there’s more to this report that I’d like to highlight.  In addition to discussing ways entities beyond simply employers — unions, associations, even faith communities — might provide retirement savings opportunities to participants, the authors feature four key principles that should underlie the development of any such plan.

First, a plan should be members-first.  This means it should have “member-focused governance structures” and  a fiduciary duty to participants.  A plan might also involve

Setting the benefit up on a not-for-profit basis so that any surplus or margin earned by the benefit is either returned to members or reinvested in improved service. . . . Such structures often involve for-profit providers, but structure the benefit or plan itself as a not-for-profit.

The report also suggests that the plan’s governance structure include some member representatives, but also be free of conflicts of interest and include experts in the field.  And these are all important goals, but at the same time, they are not as easy to achieve as one would like:  a union-sponsored retirement plan, for instance, would face pressures to favor investments in unionized industries, rather than making decisions solely for the benefit of participants.  A non-profit plan sponsor contracting with a for-profit provider might be tempted to think of the plan as a revenue source for its other activities by seeking a share of management fees, with the justification that they are providing a service to their members.

Second, the process of contributing to the plan should be automatic.  This is, they acknowledge, more difficult to implement when the employer is not contributing to a plan directly, though they offer some suggestions, such as building contributions into dues collection; making a contribution an automatic part of compensation for freelancers or self-employed workers through arrangements with organizations such as publishing houses, for writers; or using an association or union-sponsored credit card to direct savings.  It’s actually a bit surprising that they don’t include in their list the simple step of coaching participants into using automatic transfers from their checking account to build up a balance.

Third, these plans should be life cycle-based, that is serve their participants throughout their entire life cycle, through multiple job changes or as they change from employee to contractor and back again, and serve them after retirement as well — not merely by means of providing continued access to the account, but by genuinely seeking to meet the needs of retirees, with “new products, services, and strategies to help plan participants manage common post-retirement risks and issues.”

And finally, these plans should provide risk pooling.  When it comes down to it, this is ultimately the holy grail of retirement policy:  finding ways for participants to share risk among each other, now that employers are no longer taking on that risk-bearing role.  The authors write:

Two main kinds of retirement-related risk can be pooled: investment risk and longevity risk. Investment risk pooling protects members against the impact of a market downturn that occurs at the “wrong” time from a member perspective, such as right before a planned retirement. Longevity risk pooling protects members against the risk of outliving their money. Pooling can be achieved through the nature of the contract with plan members, or by providing in-plan options (such as annuities or other longevity risk pooling vehicles) for members in the near- and post-retirement phase. The risk in this case could be borne by a financial institution, such as an insurance company, or by the pool of plan members themselves.

As the report authors acknowledge, risk pooling of the sort that exists in, for example, Dutch collective defined contribution plans, simply does not exist here.  What’s more, current legislation limits the degree to which a provider could replicate such a benefit.  Consider that the report cites a church-employee benefits provider as a potential model for expansion into providing access for church members as well; church-sponsored plans, insofar as they provide benefits for their employees, have special exemptions from ordinary pension-funding legislation (ERISA and its successor laws), which in principle would enable more flexible benefit designs, but this flexibility draws criticism of participants and their advocates as soon as participants’ benefits are at risk of cut-backs.

At the same time, there is an institution which is designed to bear retirement benefit risk, an insurance company offering annuities, but few people take advantage of this option, both because anti-selection increases the cost of annuities, and because of an ongoing distrust of insurance companies as “making money when you die.”  Would a retirement plan sponsored by an entity/institution that has the trust of its participants, rather than a faceless corporation, be better able to interest its participants in annuities, or, alternatively, be in a better position to lobby Congress for more flexibility in retirement design?

One final principle which is not included here, but really ought to be, is this:  plans should encompass more than just a structure for retirement savings, but should include coaching in retirement savings and financial wellness generally.  How much should I save (with a given income level)?  How should I balance debt repayments, college savings, and retirement savings?  How can I manage my spending in order to move beyond living paycheck-to-paycheck?  — These are all questions which are part and parcel of the process of retirement savings.  Religious communities, in particular, might be well poised to help their members with the last of these questions, especially when it ties in with their teachings on modest living.

So there’s a lot to chew on here, but a lot of work involved before any of these proposals become a reality.

What do you think?  Please let me know at JaneTheActuary.com!

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