On this episode of The Long View, Mike Moran, managing director and pension strategist for Goldman Sachs, discusses how 401(k) plans can improve retirement savings and retirement readiness.
‘Rethinking the Role of the 401(k) Plan’
Amy Arnott: We’d like to switch gears a little bit and talk about another section of the report, which is called “Rethinking the Role of the 401(k) Plan.” So, if you think about the 401(k) plans, defined-contribution plans have been around for about 45 years now. You now have about $10.2 trillion in defined-contribution plans versus $3.1 trillion in private pension plans. How do you see this mix evolving over time? Will we continue to see assets shift toward the defined-contribution side at the same rate as in the past?
Mike Moran: I think that’s very likely, at least for corporate employers. For a number of corporate employers, they have stopped offering a DB benefit for new and existing employees. So, the growth of DB has slowed down. You’ve also seen a number of them taking actions to move some of these obligations off their books to an insurer as part of a pension-risk-transfer activity. So, DB, not growing as much as it had in the past, and you’re seeing companies take proactive steps to actually move some of these liabilities off rather than holding on to the obligation themselves. DC has now become the primary retirement program for many employers. And when we think about recent legislation, it’s only made it more important—again, SECURE Act 2.0 providing ways for employers to embed an emergency savings program within a 401(k) plan. That’s going to make DC even more important.
The other thing I would say is that other legislation—going back to Secure Act 1.0—created pooled employer plans or PEPs. And one of the biggest retirement challenges we have in this country is that a number of individuals are not covered by an employer-sponsored retirement program. If you work for a large employer, it is very, very likely that you have some type of retirement plan coverage, whether that be a defined-benefit plan, a defined-contribution plan, or both. But for a lot of smaller employers, they weren’t offering any retirement program to their employees. A lot of that ties into just the cost and the administrative efforts of setting up a defined-contribution program. Well, pooled employer plans are a way for unrelated employers to pool together in one plan and provide that coverage to their individuals. So, when we think about, again, the trajectory of the DC market, one of the things that should increase the growth of assets in DC is that vehicles like pooled employer plans will hopefully provide more coverage for employers, employees, get more people into the DC market, and that should provide more growth for the market.
What 401(k) Plans Are Doing Well and Not So Well
Christine Benz: What are some of the things that 401(k) plans are doing well, as well as some things that they’re not doing so well?
Moran: I think what 401(k) plans have done very well in the past is be an accumulation vehicle, a way to provide employees a way to save for retirement. You join the plan and you set up how much deferral you want, and it just happens. It’s the power of inertia. Every pay period, 10% or whatever percentage you select, is taken out of your paycheck and put into your 401(k) plan. It really helps to accumulate assets. Where we need to do a better job going forward as an industry is on the decumulation side. Right now, as more and more individuals are retiring that are not covered by a defined-benefit pension plan, it’s trying to figure out how to turn that pool of assets into a lifetime stream of income.
And then, the other thing what I think we need to do a better job at is personalization. So, we think about one of the great changes that we saw in the retirement plan industry in the DC industry over the last several decades is introducing target-date funds as a QDIA. And that was a great way to get individuals defaulted into a multi-asset class vehicle that would be rebalanced professionally where the asset allocation would change as someone got closer to the retirement age.
And that was an improvement over previous QDIAs. But it really only is based on one factor and that factor being when that individual felt they were going to retire. Well, most of us have a very complicated life. We may have a spouse, that spouse may or may not work. We may have assets outside of our 401(k) plan. How do we take all of that into account to develop what is a personalized asset allocation for you, the individual? And how should that change over time? So, I think the next phase of retirement planning is how do we bring a more personalized experience to the participant, make something more customized to them, especially as more individuals are going to be seeing their DC plan as being their primary retirement vehicle.
What Regulatory Changes Are Benefiting Retirement Savers?
Arnott: You mentioned some of the positive developments from Secure 2.0, including new plan features like provisions for emergency savings, employer matching for student loan repayments. Are there any other regulatory changes that you would think would benefit retirement savers?
Moran: We’ve gone through two really significant pieces of retirement legislation here with Secure Act 1.0 and Secure Act 2.0. And I think from a Washington perspective, a lot of the focus now is going to be the implementation of these. So, I don’t necessarily expect to see a lot of significant regulatory change coming up in the future just because we have to digest and implement a lot of the changes from Secure 1.0 and Secure 2.0. I would go back though to, again, Secure 1.0 and talk about PEPs and pooled employer plans. I think that’s going to be a very critical way to get more employees, more individuals, into a retirement program that may not be in one today. And again, coming back to many smaller employers do not provide a retirement plan for their employees, this is a way to provide more coverage. And I think that’s going to be one of the ways to benefit retirement savers is just to give employees more access to an employer-sponsored retirement plan.
Should More Retirement Plans Be Offering Annuities?
Benz: You mentioned decumulation as an area where there’s still work to be done. One aspect of, I believe it was Secure 1.0, was the Safe Harbor for 401(k) plans to offer their participants in-plan annuities. Do you think more plans should be offering those annuities for people embarking on retirement, for employees embarking on retirement? And what do you think are some of the obstacles to annuity adoption for DC plans? Because as far as I know, we haven’t seen a lot of adoption there.
Moran: One thing our survey showed was there is definitely appetite for guaranteed income by participants. So, participants saying, as they think about where they’re drawing their retirement income from, having some of that be from a guaranteed option is definitely something that’s attractive to them. But to your point, we haven’t seen a lot of adoption yet of annuities within DC plan. I think some of that comes back to many participants are just still unsure of annuities. They’re complex, they’re costly, I don’t know how this works. And so, I think over time, we’re going to see how does that fit into the retirement income stream.
But retirement income in general will be a big topic for the next several years. We say it’s been a topic as an industry for the past 20 years. But the risk of saying it’s different this time, I do think it’s different this time. And that’s primarily for two reasons. Number one, to your point, the Safe Harbor, that Secure Act 1.0 provided for having annuities in a DC plan, regulatory change is often a big driver of change in the DC market. So, when we look at that, we see that as a critical potential change that could change behavior over the next decade.
But the other factor is just natural demographics. And it comes back to as every year goes by, somehow, we all get a year older. And as we all get a year older, everyone becomes closer to retirement. And we’re seeing more and more people get closer to retirement who are not covered by that DB plan. And so, as opposed to the DC plan just being a supplemental savings vehicle, now it becomes the primary retirement savings vehicle and retirement income vehicle, how do we actually generate retirement income for participants is going to be something that over the next several years is going to receive increased focus from plan sponsors, financial advisors, and obviously individual plan participants.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.