The 401(k) industry is under attack again. This time from labor economist, Bloomberg columnist and, yes, TikTok star Kathryn Edwards in a recent webinar hosted by the National Institute for Retirement Security, who joins Alicia Munnell of Boston College, Teresa Ghilarducci of the New School and most recently, Blackrock CEO Larry Fink. as criticism.
Predictably, the defined contribution industry became defensive. While there are obvious benefits that need protection, perhaps we need to spend more time innovating to address some of the legitimate concerns raised by these respected professionals.
Larry Fink's cases compare DC to defined benefit plans, which isn't exactly fair. The industry has revamped DC designs on the fly, running into a number of fundamental problems.
The central issue is that until recently, the vast majority of employers paid little attention to their DC plan, certainly not their DB plan, as evidenced by the level of experience and amount of training provided to their workers. their frontline employees, who are entrusted with their supervision. the plan. All this can change with the war for talent, making DC plans a key weapon to recruit and retain workers, but that will take time.
Why?
Because responsibility shifts from employer to employee in a DC plan, meaning each worker is managing their own personal retirement plan, forcing them to decide how much to save, where to invest, and how to save theirs last for the rest. their life is unstable. Pension plans and annuities work because there is a large group of people whose life expectancy varies.
Unlike DB plans, DC participants switch jobs frequently with accounts in different plans and IRAs. The DC government and industry are trying to resolve this issue, but it will take time.
People are living longer although there is currently a significant decline due to COVID-19 and the opioid crisis, so the liability increases, which no one has realized. Pension providers can offer some solutions, but there is a lot of mistrust of them, partly due to unclear pricing, high fees, predatory sales tactics and loss of control of money.
Only 50% of workers have access to DC plans, which are being addressed by state mandates, tax credits, and PEPs. However, a collection of different local demands for a national problem may not be the right solution. These solutions may not address the gig economy or the new way people want to work.
Critics of 401(k) plans who cite the significant cost of 1% of GDP argue that this money could be better spent growing Social Security, which is still the best annuity plan available, or a solution federally mandated similar to the Federal Savings Plan. Portability and economies of scale in a plan run by experienced professionals may offer some benefits, but at the expense of customization and employers' ability to differentiate their benefits.
Defenders of the DC system claim that the discrimination requirement makes it equal for lower-wage workers. However, if we look at the results, higher paid workers may enjoy a larger share of assets, especially when compared to minorities. Although the system may not be rigged, the results become just as important when the government subsidizes it.
So should the federal government, through Social Security or an omnibus TSP, replace 401(k) and 403(b) plans? Although defensible in theory, the practice may not hold water. Many employers and people do not trust the government with their retirement plans as priorities change, and, as with financial services, the government is prone to conflicts of interest.
Perhaps we should acknowledge some of the issues and spend more effort on innovation, as we have recently done through PEPs, student loan programs, emergency savings plans, retirement income, personalized target dates, savings accounts managed, HSAs, financial wellness and welcome, not shying away, wealth advisors. Along with important legislative and regulatory steps to improve our retirement system, the industry needs leadership, starting with trust and counselors with less conflict which enable plan sponsors to help employees and their organizations collaborate with providers, asset managers and technology companies.
But make no mistake – now that the spotlight is shining brightly on the DC system, the industry will have to respond if results fall short of expectations.
https://www.forbes.com/sites/johnwasik/2024/04/02/why-blackrocks-larry-fink-thinks-we-need-to-re-invent-retirement/?sh=1c0973e4c1d4