Drivers of Retirement Changes
In the retirement world, Reish said there will be three main drivers of ERISA evolution: lifelong income in retirement; universal coverage through payroll; and coverage for “solos” such as gig workers.
As far as retirement income is concerned, Reish said many retirees have a legitimate fear of running out of money, sparking the need for guaranteed income in retirement. But many have been reluctant to purchase annuity products—partly due to liquidity concerns and even due to negative perceptions around the word “annuity” itself.
But a new generation of in-plan guaranteed income solutions is starting to change that.
Reish said the challenge may be partially solved by larger employers who will add retirement income provisions, products and services to their plans. “That would include the right to monthly payments without fees, the ability to change the level, the ability to take special withdrawals, education on retirement income and issues, investment management services, mutual funds and CITs that are managed for income distributions, guaranteed products,” Reish said. “These large plans can offer transparency and institutional quality and pricing.”
For retirees who are in smaller plans, Reish said he thinks “we need a new vehicle…something like a pooled employer plan, but instead a pooled retiree IRA that is managed by a professional fiduciary and provides institutional services, products, services and costs.”
For gig-type workers—one-person independent contractors—Reish said several solutions are needed.
“One would be that the companies that hire them could include them in their 401(k) plans as if they were regular employees. That actually exists now for independent contractor insurance agents who work primarily for one company—so-called career agents,” he said. “There is a section of the Internal Revenue Code that allow the insurance companies to include those agents in their benefit programs, including their retirement plans, as ‘statutory employees.’”
Enabling Guaranteed Income Solutions
There is little doubt the coming years will see an increased focus on the decumulation aspects of retirement, with Gen X—the first generation to rely more heavily on 401(k)s and IRAs than pensions—following Boomers into retirement.
Wagner noted that provisions in SECURE and SECURE 2.0 have begun to address this issue, and the DOL will be considering providing annuity options in QDIAs.
“One of the societal issues that affects the decumulation phase of retirement is that individuals are living longer, in theory the period of retirement for many people will be 30-plus years, assuming that individuals continue to retire at age 65,” Wagner said. “As a policy matter, society wants individuals to have an adequate retirement income so that individuals do not exhaust their retirement income during their lifetime.”
Brendan McCarthy, Head of Retirement Investing at Nuveen, told 401(k) Specialist that ERISA has done a tremendous job of providing a way for American workers to save for retirement with more than $9 trillion in the U.S. 401(k) system today. Now it needs to help them in their retirement years.
“Whereas ERISA has been successful in getting the American worker to retirement, we see ERISA plans evolving to help the American worker get through retirement, as 40% of retirees still risk running out of money in retirement,” McCarthy said.
How can it accomplish this? By enhancing the ability to attain guaranteed income in retirement.
“Facilitate the use of institutionally priced in-plan annuities inside of defined contribution plans—allow for Americans to have the option of receiving a portion of their retirement savings in the form of guaranteed income that the worker cannot outlive in retirement,” McCarthy said. “Proposals like Q-PON would amend ERISA and compel plans to offer a menu of payout options at retirement so that participants can make better informed choices about how to spend down their nest eggs.”
The Q-PON proposal, or Qualified Payout Option, is an initiative designed to enhance retirement security by embedding retirement income options directly into retirement plan designs. The proposal aims to simplify the decision-making process for retirees by offering options such as systematic withdrawals or guaranteed annuity income, at the point of retirement.
McCarthy added that ERISA plan fiduciaries have always served, and will continue to serve, in the best interest of their plan participants. “Where we see evolution in this role is with respect to fiduciaries starting to provide greater consideration to the decumulation—or payout—part of their employees’ retirement needs and offering a way for their workers to have the option of pension-like lifetime income through their existing defined contribution plan.”
The legacy of ERISA, McCarthy said, is one of accountability for fiduciaries and ongoing policy evolution. “But it is an evolutionary time, not a revolutionary time. We are trying to recreate the benefits of defined benefit schemes within the defined contribution system—so lifetime income built into target date funds and plan defaults, building retirement assets over time throughout the multiple careers that the younger generation is now embarking on,” he said, going on to list student loan repayment matching and auto-portability as examples.
McCarthy said Nuveen sees the U.S. defined contribution system being enhanced on two other fronts through some of the legislative changes in both SECURE and SECURE 2.0. One is further increasing access to workplace retirement plans, particularly for small companies—making it easier for more Americans to save for retirement.
The second is enhancing the ability for Americans to save more by promoting greater use of auto enrollment and auto increase provisions.
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