In the Nation's Interest
The Retirement Savings Deficit in America
by November 28, 2016
Keynote Remarks by Ron Pressman at CED’s 2016 Fall Policy Conference
I. Welcome & Setting the Stage
Thank you, Steve. I’d like to start by congratulating Congresswoman Susan Davis for her powerful keynote remarks on STEM.
I also want to thank the Committee for Economic Development – CED President and CEO Steve Odland and CED members in the audience – for inviting me to speak to so many distinguished innovators and leaders.
The work that CED does – to promote economic growth and development to benefit all Americans – is critical to our country, and to our future.
At TIAA, we share the same commitment to equity and to driving progress. Our mission is to help create lifelong financial security for all those we serve. It is my honor to have this opportunity to share our perspective on the retirement savings deficit in America – and what our country can do to help all American families build financial well-being.
We are all aware that the retirement savings deficit in this country is growing more concerning by the day: Overall, one out of three middle class American workers has nothing at all saved for retirement(i) and think they will have to work until the day they die.[ii]
What happened to the American dream of being able to retire and go fishing or head to the beach or learn a new language? How did it come to this?
Of course, this looming crisis didn’t happen overnight. And we all know the major factors that got us here:
Employers’ have shifted from defined benefit to defined contribution plans that, for most Americans, do not include lifetime income features Americans continue to find saving challenging. And over the past several decades, modern medicine has increased the length of time we can expect to live in retirement by fivefold, something that actuaries glibly refer to as “longevity risk.”
Combined, these factors are creating a $4 trillion gap[iii] between the amount Americans are saving during our working years and what we’ll need to live comfortably in retirement.
II. Cross-Generational Impact of Retirement Crisis
And each generation is facing its own difficult set of pressures and challenges.
First, a look at the Baby Boomers… Many Boomers’ retirement strategy is to work until they die. Only 55% have any retirement savings.[iv] Seventy-one percent have less than $250,000 put away.[v] With expected lifespans continuing to lengthen, many Boomers are at grave risk of burning through their nest egg and having to rely solely on Social Security. The bottom line: Many Boomers will likely have to work longer, scale back and struggle to live with very limited financial resources.[vi]
Next, Gen X—the so-called sandwich generation—now in their 40’s and early 50’s – is facing financial pressures from all sides. Gen Xers are struggling to care for elderly parents, raise kids and rebuild after the Great Recession, while trying to pay off student loans and hefty mortgages. While they recognize the importance of retirement savings,[vii] one out of three has not put any money aside.[viii] Of those who are saving, just one-third are saving 11% or more annually – which is still well below the 15% or more that experts recommend. Among those with retirement savings, the amount Gen Xers have put away is a median of $60,000 per household,[ix] compared to the estimated $1 million they will need to tide them through retirement. Bottom line: Gen X needs to buckle down before it’s too late.
Finally, the Millennials. Younger Americans – in their 20’s and 30’s – are tech-savvy and better educated, but many are underemployed and/or are swamped by student debt. Despite the myth that Millennials aren’t thinking about retirement, research shows they do care, and 64% say they are saving—they’re just not saving enough.[x] Nearly one-third are putting aside less than 6% a year.[xi] Plus, unlike previous generations, Millennials are less likely to be buying homes, so they aren’t building equity.
The good news is that Millennials are more realistic about the risks of relying on Social Security. They recognize the importance of having guaranteed retirement income streams like the pensions their grandparents had. And they are more willing than other generations to put money into an investment option that will give them lifetime income.[xii] The Bottom line for Millennials? Two words: compound Interest. The earlier they start investing for retirement, the more their money will grow. It’s really critical that they start saving early, and we need to help them do that.
There is no one-size-fits-all solution to America’s retirement crisis. But at the most basic level, as a nation, we have to help people plan and save better… so during their working years they can accumulate the wealth they will need in retirement… and during their retirement years, they can “decumulate” that wealth more effectively – by creating income streams that last throughout their lifetimes.
To make this happen, we need all stakeholders to take action now. I’ll take the next few minutes to focus on the role of policymakers. Later, during the panel, I’d be happy to speak more about what other stakeholders – such as employers, financial services providers like TIAA, educators and individuals – can do. Because we all have a role we can and must play.
III. Role of Policymakers in Mitigating Crisis
While the forces driving the retirement crisis are complex, the public policy solutions can be common-sense and bipartisan. At TIAA, we have a Five-pillar Framework for common-sense retirement savings policy. Those pillars include the following:
First, as we celebrate the tenth anniversary of the most consequential retirement plan legislation in a generation – the Pension Protection Act of 2006 -- Congress should continue its tradition of common-sense, bipartisan policymaking in the private retirement arena – and take up bipartisan bills that would build upon PPA’s success and create a new “contract” – a sort of Pension Protection Act 2.0 for the new, Defined Contribution era.
A key part of this 2.0 legislation should enhance the “safe harbor” for employers to automatically escalate workers’ default contribution rates. Automatically enrolling employees in retirement plans has been revolutionary, but too many plans—particularly in the 401(k)-for-profit world—continue to default workers at a mere 4% or less savings rate…far below what they need to build a proper retirement nest-egg. In contrast, not-for-profit DC plans—like those managed by TIAA—actively take a “plan design with a purpose” approach, with features that encourage employees to save at an industry-recommended 10% to 15% of compensation, allocating those savings to age appropriate investment options and minimizing costs. Many not-for-profit plans mandate employee contributions as a condition of employment—a feature seldom used with for-profit plans. Such plans are especially effective in higher education as evidenced by the combined employer and employee contribution rates at TIAA, which average 12.8%.[xiii]
Second. Advice on rolling over retirement funds should be subject to the same fiduciary standards as all other retirement plan advice. TIAA strongly supports the Department of Labor’s Fiduciary Rule released earlier this year, which significantly expands ERISA’s definition of fiduciary investment advice. At TIAA, we have had a longstanding commitment to putting our customers first, and we think the Department’s new regulation formalizing and implementing a best interest standard is an important way to make this the industry standard – so that financial services firms work to help more people build financial well-being. In particular, with so many Baby Boomers retiring, the fiduciary rule will go a long way in curtailing abuses in the rollover space—it’s about time rollovers are subject to the same standards as all other advice.
Third. All retirement plan participants should have access to in-plan lifetime income solutions, such as annuities in addition to automatic enrolment and escalation. The American Retirement Dream goes far beyond mere survival. For participants to realize this dream, they need lifetime income, but few actually have access to in-plan lifetime income solutions. Our participants at TIAA are the exception: on average, participants in TIAA-administered plans are on track to replace more than 90% of their income at retirement. [xiv]
We need policies so that more Americans have access to lifetime income and these policies include two critical components. The first is lifetime income illustrations, which translates a participant’s account balance into a monthly income stream—a much more meaningful number for retirement planning purposes.
The second component is QDIA Reform. The PPA’s Qualified Default Investment Alternative (QDIA) rules provide employers with a safe harbor to default participants into certain investments. More than 75% of DC plan sponsors electing to use the QDIA safe harbor default participants into Target Date Funds.[xv] We have a target date fund series of our own and we also recordkeep target date fund assets. But too many participants believe that Target Date Funds provide a level of guaranteed income, which simply isn’t true. And only about one in 10 American workers with a retirement plan has access to an in-plan lifetime income option at all.[xvi] We should update the QDIA rules so that lifetime income products can qualify for the safe harbor.
Expanding access to in-plan annuities is something that TIAA is very passionate about. We’ve seen how our systematic focus on lifetime income has led to much healthier and sustainable outcomes than strategies that focus on accumulation alone… how annuitizing—once considered a traditional/conservative approach—is now a force for innovation and a much-needed, potential solution to the growing retirement deficit.
Fourth. All workers should have the opportunity to save at work for a secure retirement.
It’s clear that people are far more likely to save for retirement through payroll deductions than on their own, yet over 67 million Americans lack access to an employer-offered retirement savings plan. Coverage is especially challenging in the small-employer segment: only one in seven businesses with fewer than 100 employees offer a qualified plan.[xvii]
TIAA believes that every worker should have the opportunity to save for retirement at work, and we support state-level “Secure Choice” initiatives, which would establish state-administered payroll deduction IRA arrangements for workers whose employers do not offer a retirement plan.
The Secure Choice approach is just a start – but it’s a meaningful one, given what we know about the importance of workplace savings.
And the Fifth Pillar is this: All savers would be well served by objective financial advice. There’s no one-size-fits-all solution for financial planning. If you’re a young adult who’s trying to decide how to allocate money among a retirement plan, a 529 for your kids, paying off your loans, buying a home …there’s no cookie cutter approach.
Not only is a long-term investment strategy a bedrock of TIAA, so is the belief that strong education and sound financial advice is critical. Most people need help in making decisions about achieving retirement security. That’s why we offer free objective advice to all of our participants and have been doing so for nearly 100 years.
These Five Pillars are a solid framework for creating common-sense retirement savings policy. But policymakers alone can’t fix our country’s looming retirement crisis—it’s a shared responsibility that must be addressed by all stakeholders–policymakers, employers, financial service providers, educators and individuals.
We all have to take action now. We all have to have skin in the game. And we all have to work together.
TIAA is committed to doing everything we can to help raise awareness and work for change, and we look forward to partnering with all of you. Together, we can help millions of American families build financial security and realize the American Retirement Dream.
(i) Bankrate, August 2014 http://www.bankrate.com/finance/consumer-index/survey-36-percent-not-saving-for-retirement.aspx
[ii] Federal Reserve Bank Report on the Economic Well Being of U.S. Households, 2014
[iii] United States Senate Special Committee on Aging, Hearing on Bridging the Gap: How Prepared are Americans for Retirement? 2015
[iv] IRI Boomer Expectations for Retirement 2016
[vii] IRI quoted by CBNC http://www.cnbc.com/2014/02/14/is-gen-x-ready-to-retire-depends-who-you-ask.html
[x] TIAA Lifetime Income Survey
[xi] IRI https://www.myirionline.org/docs/default-source/research/iri-cgk-study---millennial-retirement-research---digital.pdf?sfvrsn=2
[xii] TIAA Lifetime Income Survey
[xiii] TIAA-CREF calculates employee and employer contribution rates using participants where annual salary is known. We have determined that this subset of our participant base is a representative sample of our active contributing participant population. EE CONTR = Annual Employee Contributions/Annual Salary; ER CONTR = Annual Employer Contributions/Annual Salary. “Paving the Way to a Secure Retirement: A Model DC Approach,” TIAA White Paper 2015, page 5
[xiv] TIAA-CREF Retirement Income Index data (as of 12/31/2014)
[xv] Investment News, Choosing default investment alternatives for 401(k)s requires close due diligence
[xvi] “It’s Time for a Pension Protection Act 2.0” draft op-ed by Roger Ferguson, Jr. and TIAA Retirement Savings Fact Sheet:
“Yet relatively few Americans have access to an in-plan lifetime income investment. Estimates vary by study, from a low of 8.5% of DC plans… [PSCA 57th Annual Survey of Profit-Sharing and 401(k) plans -- finding across all plans, 8.5% offer a lifetime income option]
..to a high of 21% of plans [Towers Watson’s Lifetime Income: Making Your 401(k) Last a Lifetime (April 1, 2015) by John Haley, Chairman & CEO (finding 9% of Defined Contribution Plan Sponsors offered in-plan retirement income products). EBRI’s 2014 Retirement Confidence Survey, EBRI Issue Brief No. 397 (21% of respondents to an EBRI survey said their employers offered and in-plan annuity)]…
… with most studies finding the rate in the high single-digits to low teens.” [Aon Hewitt’s 2013 Trends & Experience in Defined Contribution Plans (survey of 400 Employers), finding 13% of DC plans offer annuity or insurance products within the plan.]
[xvii] Government Accountability Office, Retirement Security: Most Households Approaching Retirement Have Low Savings (2015).