Despite years of trying to improve the 401(k) system, American retirement policy has not managed to address the scary problems we have heard time and again: almost half of Americans do not have access to a retirement plan at work. And among those who do, millions have saved far too little for a secure retirement. In fact, the U.S. Government Accountability Office recently called for a comprehensive evaluation of the U.S. retirement system, and U.S. Sens. Todd Young (R-Ind.) and Cory Booker (D-N.J.) have introduced legislation that would create a commission to do just that.
While a commission could elevate some of the issues, the real problem with U.S. retirement policy can be summed up simply: the government keeps using the same tools to help people invest for retirement, and these tools are either the wrong ones for the job or need to be sharpened to make any impact.
As Morningstar outlined in a recent paper, the tools the government uses to help retirement investors—tax incentives, disclosure and regulating financial advice—have encouraged millions to save and invest, but they will not help achieve broader coverage or help most ordinary workers invest wisely. In short, our approach to helping people save for retirement is like trying to drive a nail with a screwdriver. And the reason we keep going to the toolbox for bigger and bigger screwdrivers is not because a screwdriver is the right tool for job, it’s just because that’s what we have always used.
Tax incentives—specifically allowing workers and companies to make before-tax retirement contributions—are designed to encourage people to save for retirement, and more importantly, motivate firms to offer 401(k) plans in the first place. However, despite periodic expansions of the tax benefits for retirement savings, around half of U.S. workers are not investors, largely because small employers are less likely to offer plans. And the truth is that this tool will never be truly effective at getting small employers to offer plans because these businesses are much more focused on keeping the lights on and making payroll than managing a plan. When small businesses do offer a fringe benefit, they tend to start with healthcare.
Disclosures are the main way the government tries to ensure that investors have access to the information they need to make informed investment decisions. The problem is this: Ordinary people saving for retirement find these disclosures difficult to understand. Most people don’t know a share class from a 12b-1 fee. It’s economically inefficient to require people to become experts in their chosen trade or even know the lingo of financial services. Furthermore, financial institutions often limit disclosures to investors only, rather than filing publicly available documents. These non-public disclosures impede third parties from effectively contextualizing that information to more broadly help investors.
Finally, the government has unevenly used regulation to govern advisors’ conduct with retail investors, enforcing different standards for different types of investment accounts, which is confusing even to professionals. For example, a person saving in their retirement account at work enjoys strong protections under the Employee Retirement Income Security Act of 1974, but when a worker rolls those accounts to an individual retirement account, they lose those protections. An easy way to understand the state of advice regulation is that for over 40 years, divergent regulations of broker/dealers, registered investment advisers and retirement plan sponsors have caught up to converging business models, where financial professionals in all three contexts represent themselves as advisors. The Department of Labor’s attempt to address this issue appears to have been successfully challenged in the courts, and the Securities and Exchange Commission is now examining imposing higher standards of care on b/ds, which could be very helpful.
So, what’s next? It’s time to try something new. Luckily, lawmakers are already thinking about going beyond the traditional tools. The Retirement Enhancement and Savings Act of 2018 would try a new way to get small employers to offer a plan—let them band together to do so. It’s time for this bipartisan idea to become law, although it won’t be a panacea. States have been experimenting with automatically enrolling workers in IRAs—an idea that was originally hatched by Washington, D.C. policymakers, but on which the states are taking the lead.
Bolder approaches would go much further. Policymakers need to embrace the new “fintech” and “regtech” companies so they have all the data they need to help investors contextualize their options. They also need to ensure that financial institutions address their own conflicts of interest for clients to get unbiased advice. Finally, policymakers need to utilize behavioral research (with a focus on investor inertia) so the investor can comprehend the options and make informed decisions about their futures. It’s time to pull a few more tools out of the toolkit to fix retirement security in America.
Aron Szapiro is the director of policy research for Morningstar .