Morningstar - Q2 2020 - 16

Dispatches

suggested enhancements that work within
the existing structure. Unfortunately,
those changes can only accomplish so much.
They won't make employer-related retirement
plans universal, and they can't prevent
leakage. Those drawbacks aren't the
policy group's fault; they work with what
they have. Today's 401(k) structure
must go.
This column proposes a New American
Retirement Plan. It assumes that Congress will
adopt a bolder approach, as with, say,
the Tax Reform Act of 1986. For the foreseeable
future, Congress almost certainly will
not, given Washington's current inability to craft
broad bipartisan legislation.

Not only does the 401(k) structure force
companies to take unwanted actions-and
spend unwanted monies-but it mandates
waste. Requiring that each firm conduct its own
due diligence, so that it arrives at its own
conclusion, is pointless. A plan that meets the
needs of one sponsor's employees will
also meet the needs for the next. Might as well
command that each U.S. company investigate the boiling point of water. Requiring that half
a million do so, rather than one, won't improve
the answer.

However, if politically unfeasible, my proposal is
operationally realistic. Every aspect of the
New American Retirement Plan already exists,
in other countries. The program would be
straightforward to build.

Neither is there logic nor justice in providing
the employees of giant corporations with
plans that, by and large, use extremely cheap
funds, while those who labor at small
firms typically are offered high-cost plans at best,
and no plans at worst. And why, for goodness' sake, does changing jobs change a worker's
investment options? It is the same employee,
planning for the same retirement. The company
should be immaterial.

The New American Retirement Plan will
in many ways be similar to the 401(k).
It will automatically enroll employees in a default
investment and then escalate their contribution
rates. It will be fully portable, so that it
"rolls over" to the worker's next employer. Finally,
it will remain fully voluntary, so that
investors can opt out of the plan, change
their investments, or alter their
contribution rates.

The solution to all these problems is
straightforward: a single national retirement plan,
shared by all workers. Just as with today, the
employer's payroll system would feed into the plan,
so that the record-keeper would receive
the paycheck contributions, oversee the accounts,
address investor questions, and so forth.
This process would occur invisibly for firms that
use outside payroll services and would require an
initial setup for the rest.

escalation, and opt-out features that mirror those
of today's 401(k) plans.
Another issue concerns the employer match.
Should it be zero? After all, if the retirement
account is fully the employee's, perhaps
the financial commitment should likewise be. On
the other hand, perhaps firms should be
required to contribute to the plan (as commonly
occurs overseas)? And if that is the rule,
should companies be allowed to exceed the
minimum obligation, if they so desired?
For those questions, I have no answers. The
subject is intensely political, with those citing
corporate freedoms and supply-side
economics likely to respond very differently than
those who invoke corporate responsibilities
and economic inequalities. It also presents
practical difficulties, because some companies can
easily afford to pay matches, whereas others
would struggle.
None of which should deter the New American
Retirement Plan's implementation. After
all, if agreement cannot be reached, we can simply
retain today's rules. The existence and amount
of a company match is voluntary. That
solution is imperfect, because it rewards those
who least need assistance-those who work
at thriving, profitable businesses-but it certainly
is workable. We are already doing it.

Eliminating the Employer

The need for one defined-contribution
plan rather than many is overwhelming. Taking
a single path, I believe, cannot be avoided.
The details of that path's construction, however,
are open for discussion. There are three
major issues.

The third issue is the plan's investment design.
Malaysia drops every defined-contribution
participant from the private sector into one highly
diversified fund, Employees Provident Fund.
That approach seems rash for the far larger U.S.
asset base, but potentially the concept
could be retained, by creating various age-based
portfolios. Each would have separate cash
flows, thereby dividing the system's trade requests.

The first-and most important-step of
retirement-plan reform is to jettison the employer's
responsibilities. This is so obvious that I can't
imagine a single person defending the proposition,
except from inertia. Expecting companies
to sponsor retirement plans is like demanding that
a dog dance; it may comply, but neither
well nor happily. Companies run businesses.
That is what they are created to do.

One is whether employee participation should
be mandatory. Many international definedcontribution systems are so constructed, while the
U.S. 401(k) structure is not. My preference
is that the new scheme be involuntary as a basic
level, then voluntary for higher contribution
levels. However, the program could also be entirely
voluntary, with automated enrollment, auto-

Or, rather than a government-managed solution,
one could create a plan that consists solely of
private providers. To be sure, that would take some
doing. How to permit competition without the
investment menu becoming larger than the wine
list at Bern's Steak House (110,000 bottles
within the restaurant, more yet across the street)?
But those are practical considerations, not

However, there will be no exceptions: Every
worker at every company, in every state,
in every industry, will have access to the new
retirement plan. In addition, the problem
of leakage will be mostly fixed.

16

Morningstar Q2 2020

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Morningstar - Q2 2020

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Contents
Morningstar - Q2 2020 - CT1
Morningstar - Q2 2020 - CT2
Morningstar - Q2 2020 - Cover1
Morningstar - Q2 2020 - Cover2
Morningstar - Q2 2020 - 1
Morningstar - Q2 2020 - 2
Morningstar - Q2 2020 - Contents
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