How to improve the flawed U.S. retirement system
(MoneyWatch) It seems that every day we read another report about our flawed retirement system. We hear that retirement confidence is at an all-time low, that more people are expecting to delay their retirement and that average retirement savings are far from adequate to fund any type of retirement. But are you and your employer willing to fix the situation? Let's see what that will take.
The TIAA-CREF Institute recently released a report that examined best practices in the design of defined contribution (DC) retirement plans, such as a 401(k), the retirement plan of choice in the private sector. TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equities Fund) is the insurance company that handles retirement plans for universities, governments, medical institutions and other nonprofit organizations. The report suggests that employer-sponsored DC retirement plans can realize the advantages of traditional defined benefit pension plans. For that to happen, however, the design and operation of DC plans need to change.
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The report advocates the following changes in order for DC plans to truly deliver secure retirements for more Americans:
- Mandatory participation or automatic enrollment
- Adequate contribution rates
- A limited set of professionally managed, low-cost, pooled investments
- Mandatory or default investment in automatic asset allocation vehicles, such as target-date funds
- Limited or no borrowing allowed from the plan
- Annuitized benefit payments
- Provision of objective education and advice for participants
Let's review the implications of these recommendations.
Mandatory participation. Americans aren't very comfortable with mandates, even if they're for our own good. Are we really ready for mandatory participation and contributions to retirement plans? Are we ready to give up investment control and acknowledge that most people aren't equipped to be their own pension managers?
Adequate contribution rates. Employees do need to contribute more money to their DC plans, but where is that money going to come from? Either employers will need to increase their contributions, which will most likely result in slower salary growth, or workers will have to spend less of their salaries and save more. Either way, that involves allocating more resources to future consumption rather than current spending. Are any of us ready to make that sacrifice? And what impact would that have on the U.S. economy?
Limited or no borrowing from the plan. Leakage from 401(k) plans due to loans and early withdrawals is a serious problem, but many people still choose to divert their retirement savings to current spending needs whenever they get the chance.
Annuitized benefit payments. Experience has shown that most people would rather receive a lump sum of money at retirement and just spend that money as they see fit instead of annuitizing or otherwise systematically generating retirement income from their savings. What's interesting is how many people prefer lump sums even though most people don't have the skills to set up that money to generate an income that will last for the rest of their lives.
Objective education and advice. Many individuals and employers want professional advice, but they aren't willing to pay for it. Instead, they opt for "free" advice from salespeople who receive commissions or are otherwise biased by the way they're compensated.
My father retired as a university professor back in 1981 under the TIAA-CREF system. My mother and father lived modestly during the time he worked, in part due to the high retirement contributions required by his employer and the middle income salary of a university professor. My parents' TIAA-CREF annuity was a significant component of their retirement security -- it ended up paying them a retirement income for 32 years.
I've been consulting, writing and researching about retirement for more than 35 years. Due to both my personal and professional experience with retirement issues, I agree with the recommendations of the TIAA-CREF report. It remains to be seen if businesses and their employees are really ready to do what it takes to fix our retirement challenges.
But if you're so inspired, you can follow the recommendations of the TIAA-CREF report -- you don't have to wait for your employer to take action, although I'd encourage you to ask your employer to help. On your own, you can:
- Contribute more money
- Use low-cost investment funds
- Resist the temptation to take out loans or early distributions from your DC plan
- Turn your savings into reliable, lifetime retirement income when you retire, instead of take a lump sum payment.
If you don't know how to complete these steps on your own, which is entirely understandable, take the time to shop around for a professional who is qualified, skilled, and compensated in a way serves your interests. This means that their compensation doesn't depend on the investment decisions you make, which usually means they are paid by the hour or by the project. You can find them if you look.
All of these steps are easy to think about and much harder to do, but they're still possible. Like it or not, nobody else will do it for you, so it's up to you to make it happen.
