Like healthcare under the ACA, will mandatory retirement plans at work become law? The movement is gaining traction with almost 30 states working on or passing state run retirement plans for smaller companies, some mandatory. But are 401k plans up to the task of delivering effective income replacement for lower wage employees? That is a question raised in a recent NBC article citing a white paper by a New School professor and a private equity executive.
401k plans were designed to be supplemental savings plans for DB plans and Social Security. Except that DB plans are all but gone and Social Security is expected to run out of money in 2034 leaving 401k and 403bs to carry a heavy load. High fees in DC plans can erode retirement savings not unlike conflicted advice – two issues addressed recently by the DOL. As people move from job to job, they often cash out smaller accounts or fail to consolidate them. In addition, retirees face the daunting task of converting account balances into retirement income that will last a lifetime.
The white paper by New School Professor Teresa Ghiladucci and Blackstone President Tony James proposes a Guaranteed Retirement Account (GRA) with a mandatory 1.5% contribution matched by employees offset by a tax savers credit for lower income workers. Investments would be available from money managers in a Federal exchange rated on their performance. At retirement, the account converts into an annuity providing a stream of income. Like with Social Security, there are no issues with portability. Will this be the new face of mandatory retirement plans?
Sounds good? Yes but…
Isn’t this just another form of Social Security that the Federal government raided when it needed money rather than putting the contributions away when they were paid? Will workers think that 3% is enough and not contribute to their 401k plan if they are even still around? Though an exchange run by an independent board sounds good, do we think that politicians are immune to big money lobbyists? And many people don’t want to give up control of their money in an annuity.
Compared to technology, financial services companies have not been terribly innovative willing to make changes that will hurt incumbents because there are fewer disruptors. The last major company that disruptor in the financial service industry that had a major impact was Charles Schwab – when he was young! On the other hand, does anyone remember MySpace?
So the only real threat to the 401k industry is the government which may be a good thing if it makes the industry more innovative to save the system. The GRA white paper, state run retirement plans and the potential of a Federally run system published on NBC.com should be warnings signs to an industry that may think it’s immune to disruptors like Facebook was to MySpace, Apple to Blackberry or Google to Yahoo.
