Morningstar Magazine - June/July 2017 - 17

Key Policy Issues
to Watch
Americans need better
access to retirement
plans, help with drawdown phase.
POLICY

Aron Szapiro

For the 10-year anniversary of Morningstar
magazine, I want to explore the key policy issues
to watch over the next 10 years. Right now,
most pundits (which I am not!) have a hard time
making predictions about the next 10 minutes,
much less the next 10 years, but I do think
there are major issues that policymakers will need
to address over the next decade that will shape
individual investors' experiences in the United
States. In this article, I'll explore the contours of
these issues and how policymakers might address
challenges investors face today.
Whenever we think about individual investors,
it's important to think about retirement savers.
Seventy-five percent of investors invest exclusively
in an individual retirement account or 401(k),
according to our analysis of the Survey of
Consumer Finances, and as the last generation
of traditional pension participants moves to
retirement, even more people will rely
on defined-contribution plans. So, one key issue
is access to retirement plans and whether
U.S. policymakers can find a bipartisan way
to expand access. Further, policymakers will need
to explore how they can make defined-contribution
plans work better for people, particularly
during the drawdown phase. Addressing these
challenges might mean reshaping the U.S.
retirement system completely. Finally, will
government unleash technological innovation
for investors? Critically, how will regulators
ultimately treat investors' data in their investment

accounts, savings accounts, and other accounts?
Further, how will regulators answer the thorny
questions of who owns this data, who can access
it, and what third parties can do with it?
Will We Take Bold Steps to Expand Access
to Retirement Plans?

The rate of participation in employer-sponsored
retirement plans has remained stubbornly
stuck at around 50% for years. (Closer to 60% have
access to a plan, but some of those workers
do not participate.) Part of this is due to small
employers. They do not often offer a plan
to their workers, who in turn rarely contribute to
IRAs on their own. In fact, only about 14% of small
employers sponsor some type of plan for their
employees to save for retirement, according to the
U.S. Government Accountability Office. Over
the years, policymakers have tried to address this
issue, but they haven't been able to move
the needle on coverage. This lack of savings is
a big problem. Many workers will be forced to rely
on Social Security for all of their retirement income.
Congress has tried to solve this problem before,
without much success. In 1997, Congress
introduced Simple IRAs to help small employers
provide retirement plans to their workers without
taking on the regulatory obligations of ERISA,
as they would if they offered a 401(k). Simple IRAs
provide a few key advantages to employers
because they have no filing requirements, and they
do not need to pass "nondiscrimination testing,"
as would be required for a regular definedcontribution plan. In 2001, Congress passed the
Economic Growth and Tax Relief Reconciliation Act,
which tried to further incentivize business
owners to set up retirement plans by increasing
the amount that owners (along with everyone else)
could contribute. These changes have not
created a lot of new retirement plans. Although
Simple IRAs are popular among small employers
that offer plans-about 40% of them use Simples,
according to the GAO-more than four in
five workers at small companies still do not have
a plan at work. And after the 2001 changes,
the number of workers covered by small plans
did not grow.
Policy experts on the politically left and right
often agree that the only way to solve the problem

is with some sort of mandate. Many countries,
such as Australia and Chile, require workers
to contribute to retirement plans. Americans,
however, are likely to be less tolerant of
such a blunt-force mandate. A more palatable
solution might be automatic enrollment-
leveraging inertia to automatically enroll workers
in a retirement account (such as an IRA) but
letting people opt out. Among employers that offer
a plan, automatic enrollment has proved to
be a boon, dramatically increasing participation.
The next step is to explore automatic enrollment
among people without workplace plans. The
Obama administration proposed these automatic
IRAs (without success), but some states are
now working on them.
Such an approach would be an intermediary step
to a longer-term solution: decoupling retirement
plans from employers, at least for people
who work for small employers. After all, IRAs have
contribution limits that are too low to be a
primary savings vehicle for most workers, and
employers cannot contribute to regular IRAs. The
United Kingdom provides an example with a
program called the National Employment Savings
Trust, which is available for small employers
who don't offer a plan, combined with a mandate
to enroll workers in the plan. The program appears
to be an early success and could be a model
for the United States.
Will Policymakers Make Defined-Contribution
Plans Look Like More Traditional Pensions?

In addition to workers lacking retirement
plans during the accumulation phase, what about
workers lucky enough to accumulate enough
savings? What do they do when they get to the
drawdown phase of retirement? Many
retirement investors are confused, and their
options of what to do are not great right now.
Broadly speaking, there are three options for
investors at retirement: take their money as a lump
sum; draw it down gradually with a structured
withdrawal plan, or buy some sort of longevity
insurance, such as an annuity.
It seems clear that, all else equal, policymakers
should prefer more people to have single-premium,
inflation-adjusted annuities. After all, annuitants

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