America’s retirement system works for employees at medium and larger employers. However, change is required for small business employees and independent contractors and I believe it needs to start with public policy. Fortunately, our policymakers and the financial services industry can work together to right the ship, strengthen public policy, and steer Americans toward a more secure retirement.
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That work has already begun, most notably with the Senate Finance Committee’s recent passage of the Retirement Enhancement and Savings Act of 2016. We’ll look at the Act and its implications for retirement security in a moment. But first, it’s important to know where we’re starting from. I believe that no meaningful progress can take place within the retirement industry unless we take a look at the current economic environment at the investor level, and understand what I term the “new economy” trends that are impacting Americans and their struggle to save for retirement. To reimagine investment success and create an environment where more Americans are prepared to retire, we must acknowledge these trends. Only then can we shape the public policy and design better retirement plans.
Absence of liquid assets
The first trend is widespread liquid asset poverty or the absence of assets that can be quickly converted to cash. A majority of households do not have enough savings (excluding retirement assets) to cover three months’ worth of expenses in case of emergency. This can leave people facing a no-win situation – tap into their retirement savings or take on debt. In fact, a recent survey by the Federal Reserve Board shed light on this trend. The survey found that 47 percent of respondents said they would not be able to pay for a $400 emergency and would need to borrow or sell something to come up with the cash.
Rising income volatility
Next, we have rising income volatility. In the simplest terms, people in poverty are earning less and their income is more unpredictable. In fact, income volatility for families earning less than the supplemental poverty measure is two times higher than that of high earners.
Growing racial wealth gap
In addition, there’s a growing racial wealth gap that desperately needs to be addressed. The gap has doubled over the past 30 years and is expected to double again over the next 30 years.
Rise of the “gig” economy
Alongside these other factors is the rise of the 1099 or “gig” economy, which, since the Great Recession of 2008, has been growing faster than the traditional W-2 workforce. Gig economy workers don’t have access to the conjoined wages and benefits package that were traditionally the path to financial security for working people. In fact, according to research, about 70 percent of 1099 workers say they have no long-term savings at all.
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Burden of student loan debt
Compounding these issues is the problem of growing student loan debt. Perhaps even you, a spouse or your children are among the 43 million borrowers who collectively owe nearly $1.3 trillion in student debt.
Delayed household formation
So when Millennials and Generation X have little to no savings, student loan debt, income volatility, and jobs that do not provide traditional benefits, what does that add up to? Not surprisingly, it leads to the next trend, delayed household formation for 25- to 44-year-olds.
The last (but certainly not the least) is the issue of growing longevity. Living longer is great . . . if you can afford it. Most people plan for 20 years in retirement, but in actuality the average couple has a 50 percent probability that one of them will live to age 92.
If at this point you’ve begun to doubt that anyone will be able to retire with a modicum of security, have faith. We can build financial security for all Americans. These trends that I’ve outlined point to five key actions we can advocate for and change in 401(k) plans through public policy and the financial services industry:
- Expand retirement coverage by legislating and creating new federal, state and city solutions
- Create new workplace-based savings vehicles for emergency funds
- Automatically enroll and escalate contributions for future and current workers
- Help workers better manage financial wellness tradeoffs that can prevent them from saving with education, tools and technology
- Default investments into packaged solutions that expect longer investment horizons, use passive core funds, diversify with liquid alternatives, address sequence of returns risk, and provide guaranteed lifetime income
The Retirement Enhancement and Savings Act of 2016 is a start. Many of the provisions are influenced by the “new economy” trends. For example, the Act includes a provision allowing open multiple employer plans (MEPs), which enable unrelated groups of employers to jointly offer a single retirement plan to their employees. It also adds a tax credit for small businesses that automatically enroll participants. Open MEPs will naturally allow more small employers to offer 401(k) plans through the pooling of assets, generating cost-efficiencies not otherwise available for small plans. This is a win for both employers and employees. Nearly 50% of small businesses do not offer employer-sponsored retirement plans, and the primary reason is cost. Low-cost open MEPs can also potentially have an impact on closing the racial wealth gap by helping the 22 million people of color who work for small businesses save for a secure retirement.
The Act also includes language encouraging the use of guaranteed lifetime income products in retirement plans, which we know can help address the challenges of living longer in retirement.
The Retirement Enhancement and Savings Act is expected to be taken to the Senate floor in 2017. In the meantime, policymakers, financial services professionals, employers and the public must educate themselves and advocate for this and other policy and retirement plan design changes that will strengthen America’s retirement infrastructure and help people retire with dignity. The future depends on it.
Jamie Kalamarides is head of Full Service Solutions and CEO of Prudential Bank & Trust, FSB, businesses within Prudential Retirement, a unit of Prudential Financial, Inc. He also serves as a director for the Corporation for Enterprise Development (CFED), a national not‐for‐profit that creates economic opportunity to alleviate poverty. Kalamarides writes and speaks frequently on expanding retirement coverage for underserved workers, increasing savings among low‐to‐moderate income families and providing effective lifetime income solutions for all.