Morningstar - Q2 2020 - 17

theoretical difficulties. The question of plan design
yields many reasonable answers.
Lessons From Abroad

One final item remains: reducing early withdrawals. Today's 401(k) plans suffer substantial
leakage, resulting from employee decisions
that can fairly be called harmful. Workers leave
a company and then spend that 401(k)
account rather than roll it into an IRA. Or they
cannot make the down payment on a new
car, so they supplement their checking account
with 401(k) assets. Such decisions weaken
retirement readiness and incur tax penalties along
the way.
That makes no long-term sense, either for
the employee or for the federal government, which
would much prefer that the country's retirees
be financially secure. Fortunately, this problem has
an easy fix, because other countries have
studied the issue. Forget tax penalties; they do not
sufficiently deter foolishness. Instead, ban
early withdrawals outright. After all, retirementplan investors receive a benefit from the
government for deferring taxes. It is only fair that
they give something back.
Of course, such regulations must be infused
with common sense. The dying woman should not
be denied her money, even if she is not
yet 65. Australia, to cite one example, has already
considered these possibilities. It has established
a series of hardship exceptions for early
withdrawals from its superannuation funds
("supers" to the Aussies). Copy those rules and
think no more of the matter.
The United States largely invented definedcontribution investing. Other countries learned
from its example. In the 42 years since IRS
Section 401(k) was crafted, the rest of the world
has spent millions of hours studying ways
to improve on the original model. Now is the time
for the U.S. to return the favor to those that
it has assisted, by using what they have developed.
Now is the time for change. K
John Rekenthaler is a vice president with Morningstar
Research Services. He is quick to point out that the views
expressed in Ivory Towers are his own.

Reforming the U.S.
Retirement System
Any plan must
go beyond just fixing
401(k)s.

POLICY

Aron Szapiro

In the preceding pages, my colleague John
Rekenthaler outlined why he thinks the
U.S. 401(k) system has failed and why it should be
replaced with a new national, universal
retirement system.
In sum, he argues that a solely employerbased approach has made our system inequitable
because many people, through no fault
of their own, do not have access to a definedcontribution retirement plan, like a 401(k),
at work. Without a workplace plan, these unlucky
workers have few options to meaningfully
prepare for retirement. Further, Rekenthaler
discusses the inadequacy of the system for those
who do not save enough or let their assets
leak out when they change jobs or cannot pay
back a 401(k) loan.
The policy research team at Morningstar,
which I head up, has spent time evaluating many
of the less radical overhauls that people
have proposed, such as newly legal pooled
employer plans and experimental staterun automatic IRAs-both of which we think have
potential to improve our retirement system.
It is important to understand that any
comprehensive overhaul of the retirement system
must go beyond reforming defined-contribution
plans. Any reforms aimed solely at the
defined-contribution system would still represent
a piecemeal approach, leaving other pillars
of our system further misaligned.

Let's start with the third rail of U.S. politics-
Social Security-and then move on to our
still-large pension system and our muddled
retirement income policies.
Shore Up Social Security, Too

One reason that Americans tend to have
pretty good income replacement in retirement,
despite the problems with the 401(k) system,
is that Social Security covers around 96%
of workers and is highly progressive. (Most of the
people not covered are government employees
with state-provided defined-benefit plans.)
This first pillar of the U.S. retirement system
replaces as much as 90% of income for low-income
workers. The system does what it is supposed
to, at least right now: The Social Security
Administration reports that just 7.3% of people
collecting Social Security benefits are
in poverty.
Concurrent adjustments to Social Security
will be critical if policymakers rethink
our defined-contribution system. Contributions
to Social Security are already 12.4% of salary, split
between workers and employers. Combine
that with a new universal defined-contribution
system, and the total contribution would
likely jump to more than 20% of a worker's salary
in order to achieve reasonable retirement
income for higher-income people for whom Social
Security replaces less. Regardless of whether
workers or employers technically pay for
these contributions, this would represent a large
increase in resources devoted to retirement
savings and raise other questions about the design
of Social Security.
Depending on the level of contributions, do the
benefits need to be as progressive going
forward for those who spend their working lives
in the new system? Would it make more sense to
means-test for Social Security because a
mandatory system reduces the moral hazard that
people won't save if they know they have
a minimum benefit in store? On the other hand,
would people take imprudent investment
risks if they know a means test would act as
an income floor? There are lots of ways to address
these questions but leaving them unanswered
would create more problems rather than fewer.

morningstar.com/lp/magazine

17


http://www.morningstar.com/lp/magazine

Morningstar - Q2 2020

Table of Contents for the Digital Edition of Morningstar - Q2 2020

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
Morningstar - Q2 2020 - 4
Morningstar - Q2 2020 - 5
Morningstar - Q2 2020 - 6
Morningstar - Q2 2020 - 7
Morningstar - Q2 2020 - 8
Morningstar - Q2 2020 - 9
Morningstar - Q2 2020 - 10
Morningstar - Q2 2020 - 11
Morningstar - Q2 2020 - 12
Morningstar - Q2 2020 - 13
Morningstar - Q2 2020 - 14
Morningstar - Q2 2020 - 15
Morningstar - Q2 2020 - 16
Morningstar - Q2 2020 - 17
Morningstar - Q2 2020 - 18
Morningstar - Q2 2020 - 19
Morningstar - Q2 2020 - 20
Morningstar - Q2 2020 - 21
Morningstar - Q2 2020 - 22
Morningstar - Q2 2020 - 23
Morningstar - Q2 2020 - 24
Morningstar - Q2 2020 - 25
Morningstar - Q2 2020 - 26
Morningstar - Q2 2020 - 27
Morningstar - Q2 2020 - 28
Morningstar - Q2 2020 - 29
Morningstar - Q2 2020 - 30
Morningstar - Q2 2020 - 31
Morningstar - Q2 2020 - 32
Morningstar - Q2 2020 - 33
Morningstar - Q2 2020 - 34
Morningstar - Q2 2020 - 35
Morningstar - Q2 2020 - 36
Morningstar - Q2 2020 - 37
Morningstar - Q2 2020 - 38
Morningstar - Q2 2020 - 39
Morningstar - Q2 2020 - 40
Morningstar - Q2 2020 - 41
Morningstar - Q2 2020 - 42
Morningstar - Q2 2020 - 43
Morningstar - Q2 2020 - 44
Morningstar - Q2 2020 - 45
Morningstar - Q2 2020 - 46
Morningstar - Q2 2020 - 47
Morningstar - Q2 2020 - 48
Morningstar - Q2 2020 - 49
Morningstar - Q2 2020 - 50
Morningstar - Q2 2020 - 51
Morningstar - Q2 2020 - 52
Morningstar - Q2 2020 - 53
Morningstar - Q2 2020 - 54
Morningstar - Q2 2020 - 55
Morningstar - Q2 2020 - 56
Morningstar - Q2 2020 - 57
Morningstar - Q2 2020 - 58
Morningstar - Q2 2020 - 59
Morningstar - Q2 2020 - 60
Morningstar - Q2 2020 - 61
Morningstar - Q2 2020 - 62
Morningstar - Q2 2020 - 63
Morningstar - Q2 2020 - 64
Morningstar - Q2 2020 - 65
Morningstar - Q2 2020 - 66
Morningstar - Q2 2020 - 67
Morningstar - Q2 2020 - 68
Morningstar - Q2 2020 - 69
Morningstar - Q2 2020 - 70
Morningstar - Q2 2020 - 71
Morningstar - Q2 2020 - 72
Morningstar - Q2 2020 - 73
Morningstar - Q2 2020 - 74
Morningstar - Q2 2020 - 75
Morningstar - Q2 2020 - 76
Morningstar - Q2 2020 - 77
Morningstar - Q2 2020 - 78
Morningstar - Q2 2020 - 79
Morningstar - Q2 2020 - 80
Morningstar - Q2 2020 - 81
Morningstar - Q2 2020 - 82
Morningstar - Q2 2020 - 83
Morningstar - Q2 2020 - 84
Morningstar - Q2 2020 - 85
Morningstar - Q2 2020 - 86
Morningstar - Q2 2020 - 87
Morningstar - Q2 2020 - 88
Morningstar - Q2 2020 - 89
Morningstar - Q2 2020 - 90
Morningstar - Q2 2020 - 91
Morningstar - Q2 2020 - 92
Morningstar - Q2 2020 - 93
Morningstar - Q2 2020 - 94
Morningstar - Q2 2020 - 95
Morningstar - Q2 2020 - 96
Morningstar - Q2 2020 - Cover3
Morningstar - Q2 2020 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2024q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2024q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com