Rethinking the Idea That There is a Retirement Crisis

With today’s retirement system, Americans today have greater access to workplace retirement plans than in the past, are saving proportionately more, will have more money in retirement, and have better protections in place to help guard their savings, the Empower Institute argues in a new report, “The Over-Stated Retirement Crisis.”

While some claim that employees were better off when defined benefit (DB) plans were the dominant retirement savings vehicle, the report notes that on a systemic level, DB plan coverage was not portable—and DB plans covered relatively few people. In 1950, 10 million Americans, or about 25% of private-sector workforces, had a DB plan. The percentage of workers with a DB plan increased, to about 50% in 1960, before dropping off again. In 1980, 38% of workers had DB plan coverage, and as of March 2018, 26% of civilian workers had access to a DB plan.

The Empower Institute notes that between 72% and 90% of pension participants did not qualify for DB plans because of strict vesting schedules. It says individual plans’ challenges included discrimination toward rank-and-file workers and occasional misuse by corporations. DB plans had positive qualities—employees with access to a DB plan had a clear retirement day with a fixed payout, and the employer, rather than the employee, assumed the burden of funding the plan. But, the report says, many of the positive aspects of DB plans are being replicated through the modernization of the current retirement system.

According to the report, approximately $7.5 trillion are held in defined contribution (DC) plans, and access to workplace plans has increased over time. Access at the household level has expanded, as well. While 71% of civilian employees have access to either a DB or a DC plan, in 80% of marriages, at least one spouse has access to a retirement plan. The shift from DB plans to modern DC plans has played an important role in this increase, the Empower Institute claims.

Modern plans are also more available to employees of small businesses, the report says. In 1981, there were only about 4 million participants in pension plans at companies with fewer than 100 people. In 2015, by contrast, DB and DC plans covered nearly 11 million participants at businesses of that size. The report notes that 97% of 401(k) plans are sponsored by companies with 100 or fewer employees. “It’s likely these employees would never have had access to any workplace retirement plan in the 1970 s and 1980s,” the report says.

Headlines say there is a retirement crisis in this country, but in reality it is an impending retirement crisis that sources say policymakers and retirement plan sponsors can take measures to avoid. One factor sources say could lead to a crisis is a coverage gap. The Empower Institute agrees that moving forward, coverage could increase if legislation approving open multiple employer plans passes. This is one feature of the SECURE Act, which lawmakers and industry groups are anxious to get passed.

Employees are saving more

According to the Empower Institute report, thanks to modern plan design, including auto-features, employees in workplace retirement plans are saving more now than they ever have. Total employee and employer contributions have increased from an average of 9.9% of employee salaries in 1984 to 12.8% of employee salaries in 2017.

In addition, the amount of money saved in retirement savings accounts is at near-record levels. In 1975, total retirement savings were equal to 48% of total employee wages according to Federal Reserve Board data. In 2017, retirement assets topped 337% of employee wages.

The report points out that these savings numbers do not include potential savings outside of employer-sponsored plans. And, employees still have Social Security to make up what was once called the “three-legged stool” of retirement savings.

“Consider the fact that future retirees will be able to maintain the standard of living set by previous generations. Retirees born during the Great Depression had a median income equal to 109% of their average inflation-adjusted earnings. Gen Xers are on track to replace 110% of their earnings,” the report says.

However, while the report authors are adamant that the current retirement system is not broken, they say the industry can still work to improve it. Within individual plans, employers can choose options, such as automatic features, company-matching contributions, financial wellness plug-ins and advice solutions that can help their employees save more.

More protections

Retirement savings in DC plans are portable, allowing employees to take their retirement assets with them as they move from job to job, the report notes. However, when DB plans were the dominant retirement savings vehicle, it was difficult—if not impossible—for employees to seek a new job without affecting their retirement readiness.

The report authors add that regulation has been refined over years to offer employees more protection of their retirement assets. They offer as examples, the nondiscrimination testing rules and increased transparency of plan fees.

And, while admitting it is not a protection in the regulatory sense, the authors note the increased availability of investment and retirement planning advice has been proven to improve overall retirement readiness.

One type of protection not mentioned by the report is guaranteed income. However, the SECURE Act includes a safe harbor provision for in-plan annuities, which are the most cost-effective way to purchase them. Lawmakers, regulators and retirement plan providers are hopeful that the SECURE Act, or at least increasing discussion about annuities in DC plans, will lead to more product innovation and adoption by plan sponsors.

“Far from existing in a state of crisis, the retirement system as a whole positions Americans for a successful retirement. The retirement services industry has many players who compete in a marketplace of ideas, helping to ensure the system remains robust, competitive and flexible,” the Empower Institute report says.