The 401(k) has been under attack on multiple fronts lately.
Between calls for eliminating their tax advantages to prop up Social Security to Bernie Sanders pining for a return to pension plans, and momentum seeming to build for the TSP-like “Retirement Savings for Americans Act” that many in the workplace retirement market believe would constitute unfair competition from the federal government, it’s enough to have retirement plan advisors feeling a little defensive these days.
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Fortunately, plenty of retirement industry experts have stepped up to answer these attacks, and today’s podcast features a prominent one in Sarah Holden, senior director of retirement and investor research at the Investment Company Institute.
ICI has been very active in debunking recent attacks on defined contribution plans, and Holden makes some great points in defense of the 401(k).
SEE ALSO:
• Issue 2 2024 Cover Story: Defending the 401(k)
• Facts Don’t Back Recent Criticism of Voluntary Retirement Plan Market
Click to read the audio transcript here.
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Brian Anderson: [00:00:00] This is 401k Specialist Editor in Chief Brian Anderson and this is the 401k Specialist Podcast. If you’re feeling a little like the 401k has been under attack lately, you’re not alone. Some economists have been calling for an end to federal tax breaks for 401Ks in favor of propping up social security.
You have Bernie Sanders pining for a return to the bygone era of pension plans and some increasing support for proposed legislation that would create a TSP like plan run by the federal government that many believe many in the workplace retirement plan market believe would constitute unfair competition.
It’s all enough to have retirement plan advisors feeling a little bit defensive. Fortunately, plenty of retirement industry experts have stepped up to answer these attacks, and we’re going to talk to a prominent one today right after this brief message.
Sarah Holden is the Senior Director of Retirement and Investor Research at the Investment Company Institute, the leading association representing regulated investment funds. Sarah leads the [00:01:00] Institute’s research efforts on investor demographics and behavior and retirement and tax policy. She heads efforts to track trends in household retirement saving activity and is also responsible for analysis of 401k plan participant activity using data collected in cooperation with the Employee Benefit Research Institute.
ICI has been a steadfast supporter of the Defined Contribution Plan market and has been quick to respond to a lot of these recent attacks on 401ks. So we’re excited to hear more about how some of these proposals are being debunked. Welcome to the 401k Specialist Podcast, Sarah.
Sarah Holden: Brian, thanks so much for having me.
Brian Anderson: Well, first off, I’m curious as to whether you got a chance to tune into Wednesday’s Senate HELP Committee hearing and if so, what your thoughts were on the testimony and discussion. I know ICI has published extensive research that the retirement crisis is greatly overstated, but according to Bernie Sanders and some of the speakers on Wednesday, there is a serious retirement crisis.
Sarah Holden: It’s really hard to [00:02:00] find a retirement crisis when you look at the data, and we look really into two areas. First, let’s look at retirees today. And when we look at retirees today, we see that the typical retiree is maintaining their pre retirement income. So they’re able to, using social security, uh, define benefit plans, define contribution plans, like 401k plans, IRAs, they’re able to pull all that together and generate income that basically allows them to maintain the standard of living that they had before retirement.
And indeed, when we look at the tax data, we see that the typical retiree is maintaining more than 90 percent of their average age, 55 to 59, inflation, inflation adjusted. spendable income. So this is really remarkable replacement of income in retirement. When we look at folks who are 72 years, two years old, 72 years old, we see that they’re receiving, the [00:03:00] three quarters of them are receiving income from retirement plans.
So this is very widespread, this use of the DB, the DC, the IRA, in our system. And when we look at workers today, we’ve got Literally trillions of dollars earmarked for retirement. Near retiree households, those households who are working and approaching retirement age, three quarters of them have defined benefit plans, defined contribution plans, or IRAs to help support them in retirement.
And some folks say, well, that’s great, the older generations are doing okay. Actually, we’ve got really good news with the younger generations. If we look at Gen Z households, So these are very young households. They are much more likely to have already started saving for retirement than their Gen X counterparts in 1989.
So pulling together real hard data, looking at who’s participating, who’s accumulating assets, and who’s drawing income from these plans. [00:04:00] paints a very different picture, a very successful picture of the U. S. retirement system.
Brian Anderson: Okay. Let’s drill down a little bit on one of the proposed fixes that some of these 401k critics are calling for, which is essentially an expansion of the federal government’s Thrift Savings Plan.
There seems to be some momentum building for the Retirement Savings for Americans Act, which would create a TSP like plan for lower income private sector workers with The federal government providing matching contributions instead of employers. Can you tell us about ICI’s position on this?
Sarah Holden: Yeah, so ICI’s position is that, of course, we want to build on the strength and the success of the current system.
That said, um, these TSP like proposals really missed the mark. We’re concerned that there are significant cost implications. They will lead to a plan that has limitations on investment choice. And it’ll also put a damper on the incentives for the employers to sponsor and make employer contributions to the very vibrant [00:05:00] 401k system.
And when I look at the 401k system today, it’s, you know, bringing in millions of workers across all incomes and nine out of 10 401k participants are in a plan where their employer actually makes contributions to their accounts. So this really boosts. is over time. So I would say that this proposals or these types of proposals really missed the mark and could really harm the retirement savers they’re aiming to help.
Brian Anderson: Another proposal that has gotten a lot of attention lately is the Andrew Biggs, Alicia Monell, Michael Wickline, working paper that says we should eliminate the tax advantages of 401k plans because they disproportionately benefit the wealthy and use that money to aid social security’s trouble finances.
That’s riled up a lot of people and organizations throughout the retirement community, including the Investment Company Institute. Can you highlight some of the problems ICI is with this idea?
Sarah Holden: So the Biggs Monell proposal [00:06:00] really aims to pit the two strongest components of our system against each other. Policymakers designed the U. S. retirement system so that we would have social security, which is a mandatory defined benefit plan across essentially all workers and it’s a very strong defined benefit plan That is also progressive in design in that it provides a very high replacement rate for income for the lower income households and then as we move up the income distribution social security still provides a significant benefit in terms of dollars, but replaces a much lower percentage of a middle income workers income in retirement.
And so, policy makers created the voluntary system offered by employers and individual retirement accounts to complement social security so that between these two pieces Each household could build a nest egg to complement social [00:07:00] security to replace their income in retirement. So it’s actually the design of social security that drives That’s the pattern of participation that we see across the income distribution in employer sponsored plans and IRAs.
That said, uh, more than half of defined contribution plan owning households, so households that have actually a DC account. More than half of them earn less than 100, 000 a year in household income. So we really are bringing in across the full income distribution into the 401k system, the IRA system. So is it a good idea to now take away the tax incentives for this very strong component of the system that was designed to compliment social security?
We just think it’s a terrible idea, and it dismisses the important role that employer plans play in [00:08:00] promoting retirement saving. ICI does a survey each fall of, uh individuals across the United States. And we focus in part of the survey on the folks that own defined contribution plan accounts. We ask them about the characteristics of 401k plans or DC plans. And half of these individuals say that if it weren’t for their plan at work, they actually probably wouldn’t be saving for retirement. So the strength of that system really should not be dismissed as we think about building more success for more folks.
Brian Anderson: All right. I love your answer there. And I couldn’t agree more. At the end of February, you just, uh, you released some new research showing how IRAs play a key role in a U. S. household retirement planning. What are some of the key takeaways from this new study?
Sarah Holden: Yeah. So the individual retirement account, the IRA, was created in 1974 with ERISA. So it’s actually turning 50, this year around Labor Day. [00:09:00] And it really is a strong component of our system. And the thing that’s interesting about IRAs is they were originally created. with two purposes. So right from the start, there were two goals. One that it could be a place where someone who didn’t have a plan at work could make contributions on a tax advantage basis to build a retirement nest egg for themselves.
But also right from the start, policymakers recognized we have a mobile workforce. And as people tumble through their careers, there might be a place that they would want to consolidate. Their retirement assets. So it’s always been a place where you could roll over your either your defined benefit cash out or your balance from your defined contribution plan.
So the IRA right from the start has had these two goals and this Report that we just released just looks into IRA owning households to see how they’re managing that nest egg. And for the most part we see that indeed the majority of them 62 percent do have rollover [00:10:00] money in their traditional IRA So they have used that ability to preserve their assets as they tumble through their careers.
We also see that they tend to, uh, steward those assets, not only to but through retirement. And indeed, in the case of the traditional IRA, the withdrawals that are taken typically happen in retirement, and usually they start when the law requires them to. So when the required minimum distribution kicks in, and you have to start taking the money out based on your life expectancy, which is a pretty good rule of thumb.
So we see that, people are managing that nest egg, not only up to retirement, but through retirement. And it really plays a significant and complementary role to the employer plans. I would also just note when we talk about coverage in the United States, the IRA is available to anyone with earnings.
So any worker with earnings can open up an IRA. And indeed, we’re a little unique in the nation in that we [00:11:00] also have a spousal IRA. So a spouse who doesn’t have earnings, can have an IRA opened in their name using the earnings of their, the spouse that has earnings. So you’re able to, as a household, think about building a nest egg not only for the working spouse, but for the spouse who doesn’t have earnings as well.
Brian Anderson: Now let’s pivot a little bit, uh, for today’s mobile workforce, which includes a lot of, employees who frequently change jobs, designing a 401k plan that meets their unique needs can be a bit of a difficult challenge. Can you talk about some of the considerations that need to be accounted for these people?
Sarah Holden: Yes. as I mentioned, uh, in the U S we tend to change jobs. So we tumble through our careers and the defined benefit plan in terms of a design was really set up. for workers who would stay at one job for many years and retire from that job. So if you are a young worker just starting out in your career and you have a defined benefit plan, [00:12:00] the chances are you’re going to leave either before you vest, or even if you have a vested balance, it’s going to be locked into those early career salary, and it’s really at the end of your career, not going to be able to contribute very much.
In contrast, the Defined Contribution Plan is really designed for that mobile workforce. So in designing a plan that really helps, young workers or workers who will be changing their jobs as they go along. It’s important to have, you know, relatively quick vesting. I think the, uh, employer contributions, which, as I mentioned, 401k participants have employer contributions, that people get vested in those so that that’s, uh, becomes part of their nest egg.
And then just education around, as you do change jobs, what your options are in terms of leaving the balance behind in the plan or rolling it over to an IRA where you can, uh, keep track of it over the rest of your career and kind of build a, Nesting in one spot really is, is helpful in terms of the [00:13:00] education efforts along the way.
Brian Anderson: Okay, before we wrap this up, in a general sense, it kind of seems like the defined contribution market really has been under attack on multiple fronts lately. We even had that, one clickbait headline from Allison Schrager of the Manhattan Institute saying your 401k will be gone within a decade.
How worried should retirement plan advisors be right now about, the pendulum swinging away from 401k plans?
Sarah Holden: I really think that if the pendulum tries to swing away from 401k plans, there will literally be millions of American workers hanging on to that pendulum. The 401k is widespread in its popularity. The survey that we do each fall asking Americans, uh, their views on The U. S. retirement system, we asked them about their favorability towards, the idea of a defined contribution or a 401k plan. And the vast majority of them, 85 percent have favorable [00:14:00] impressions of these plans. On 75 percent of Americans, whether they have a plan or not are confident that these plans can help people meet their retirement goals. We also ask, Americans whether we should change the policies around 401k plans. And again, whether or not people have a plan, they’re against taking away the tax advantages. They’re against reducing the contribution limits. They’re against taking away the investment choice. So there is really a lot of commitment across the nation To, this system of building your own account that is yours. It’s in your name. And you know, your employer typically puts money in for you, so that’s great support. You have choice in the investment options and control.
So that’s something that they appreciate. So I really think swinging that pendulum away from this very strong savings tool, will be an uphill battle for those who want to do [00:15:00] it.
Brian Anderson: Great. Well, Sarah Holden and the Investment Company Institute, keep up the good work and thank you so much for sharing your insights on the 401k specialist podcast.
Sarah Holden: Well, thanks so much for having me. Appreciate it.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
