In the relatively short time since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974 and the Tax Revenue Act of 1978, the traditional 401(k) plans have been the a source of great scrutiny and the subject of extensive study. Essentially discovered by accident and created as a by-product of the Tax Revenue Act of 1978, 401(k) plans seem to be in a perpetual state of growing pains. The only problem with that is that 401(k) plans are almost 50 years old, exactly when are they going to grow up?
Plan sponsors routinely deal with a multitude of issues including: plan participation levels, deferral amounts, investment choices, fees and a litany of other major administrative concerns (not to mention a tidal wave of class-action lawsuits). If 401(k) plans were addressing the needs of retirees efficiently, there would be no need for this discussion. The fact of the matter is, after 50 years, 401(k) plans are falling short of the mark; too many Americans are simply not ready for retirement.
Morningstar Columnist, John Rekenthaler argues that 401(k) plans have simply been left to their own devices (relatively untouched by government interference) for too long and have reached a sort of arrested development point where fundamental changes are needed.
Rekenthaler identifies three issues that are causing stagnation in the 401(k) industry that can only be overcome by changing regulations he argues.
- Small Business adoption of 401(k) plans or other defined contribution (DC) plans is severely limited and employees at those companies simply do not have access to a DC plan,
- Smaller companies with fewer employees are beset by higher fees as economies of scale favor larger companies; and,
- Larger companies are burdened with 401(k) class-action lawsuits that have gone beyond the realm of reasonable accountability due to vaguely and hastily enacted statutes and unclear articulation of the rules; giving rise to a lucrative side industry for over-aggressive law firms to exploit otherwise well-meaning plan sponsors and advisors.
It’s hard to argue with Rekenthaler’s thesis on the three issues he cites, but these are symptoms of a larger malady. The underlying problems are the challenges of universal access and portability. Not unlike healthcare, the issues of universal access and auto portability speak to the issue of decoupling retirement savings from employment.
The typical plan sponsor is slowly dying a death of a thousand cuts as each administration adds to its responsibilities in a futile attempt to force an unlikely outcome. This is especially unfair to plan sponsors and highly ineffective for employees considering the average employee will change jobs 7 times in their lives.
Household Saving Rate in the United States increased to 5.90 percent in March from 5.60 percent in February of 2017. Personal Savings in the United States averaged 8.29 percent from 1959 until 2017, reaching an all time high of 17 percent in May of 1975 and a record low of 1.90 percent in July of 2005.
The Employee Benefit Research Institute (EBRI) estimates that if Americans were able to effortlessly, automatically roll their 401(k) balance over to a new employer every time they switch jobs, they would have an additional $2 trillion in retirement savings by age 65. And while market participants such as The Retirement Clearinghouse attempt to address the issue of 401(k) plan portability (and do it with incredible efficiency), their influence and penetration only begins to scratch the surface of the portability issue.
However, based on the model put forth by the Retirement Clearing House, the creation of a public/private initiative whereby employees could gain universal access to and choose among qualified 401(k) plan providers, with regionally authorized plan advisors, designated record keepers, where plan sponsors merely facilitate the administration of employee accounts, would break the stagnation of the past decade and lead to better outcomes. This also would- by default -provide a platform for auto portability as accounts would not be tied to the employer, but to the provider/record keeper and the employee.
Decoupling defined contribution plans from plan sponsors is a concept, like healthcare, whose time has come. But as Morningstar’s Rekenthaler laments, does Washington have the will?