Teresa Ghilarducci doesn’t like 401(k)s, and the DOL’s fiduciary rule does little to mitigate her distaste.
The professor of economic policy analysis at the New School for Social Research in New York committed financial heresy earlier this year in a widely-read op-ed in The New York Times. Written in conjunction with Blackstone president and COO Hamilton “Tony” James, she bluntly called the current retirement system for the majority of Americans—a mix of 401(k)s and IRAs—“broken.”
Her proposal in the Times, developed with James from an accompanying paper, would make saving for retirement mandatory with something called (what else?) Guaranteed Retirement Accounts, which immediately sent a shudder through the 401(k) industry—advisors no exception.
“It’s an improvement on the 401(k) system, which isn’t close to being what’s needed,” she continued to argue in an interview with 401(k) Specialist on Monday. “It’s like we’re picking up the toddler, and helping this immature, underdeveloped child over the puddle and to the curb.”
She added that there’s “no indication that the 401(k) will ever include everyone, reduce fees to where they are appropriate, match long-term investing with long-term needs or provide fully for lifetime income. We need something that’s mandatory, with no leakage, and that’s what this is.”
But what about the undeniable success of “auto-everything” (auto-enrollment, auto-escalation, auto-portability)? Why such a radical up-ending of the system now?
“In 1934, people were increasingly anxious about poverty at advanced ages,” she professorially explained. “In fact, 23 states had passed or were preparing to pass old age income acts, where they would tax citizens in order to pay for retirement. Social Security was passed in 1935 at the federal level, so the state acts went away. Today, we’re seeing the same patterns, and now 23 to 25 states are passing mandatory savings acts.”
We noted that her proposal would essentially be an annuity, as is Social Security, but Ghilarducci emphasized that Guaranteed Retirement Accounts are not simply an expansion of Social Security, and got metaphorical to explain why.
“I liken it to health care, where people said those lacking in coverage can always go to the emergency room when they get sick. Well yes, but that’s not sustainable. Social Security is the emergency room of retirement savings; it’s basic care. Retirees need a supplemental annuity in addition to Social Security, for which this provides.”
As for the likelihood that something like her idea will come to pass, she said she’s heard from quite a few politicians in Washington praising her plan, and specifically noted that Marco Rubio proposed something similar last year.
“I became worried [about a retirement crisis] as defined benefit plans disappeared,” she concluded. “There are hardly any poor people with a defined benefit plan. Tony James will tell you whenever he sees a defined benefit plan replaced with a defined contribution plan for a middle-class person, it makes their situation more tenuous.”