The 401(k) industry is under attack again. This time by labor economist, Bloomberg Columnist and, yes, TikTok star Kathryn Edwards in a recent webinar hosted by the National Institute on Retirement Security, who joins Boston College’s Alicia Munnell, the New School’s Teresa Ghilarducci and, most recently, Blackrock CEO Larry Fink as critics.
Predictably, the defined contribution industry got defensive. While there are obvious benefits that do need defending, perhaps we should spend more time innovating to address some of the legitimate concerns raised by these well-respected professionals.
Larry Fink’s issues compare DC to defined benefit plans, which is not exactly fair. The industry has been retrofitting DC plans on the fly, running into a series of fundamental problems.
The central issue is that until recently, the vast majority of employers cared little about their DC plan, certainly nothowy they focused on their DB plan, evidenced by the level of experience and amount of training provided to their front-line workers entrusted with overseeing their plan. All of this may be changing with the war for talent, making DC plans a key weapon to recruit and retain workers but that will take time.
Why?
Because liability shifts from the employer to the employee in DC plan,s which means every worker is managing their own personal pension pla,n forcing them to decide how much to save, where to invest and how to make their savings last for the rest of their lives all of which is untenable. Pension plans and annuities work because there is a large pool of people whose lifespans vary.
Unlike with DB plans, DC participants change jobs frequently with accounts in various plans and IRAs. The government and the DC industry are attempting to solve this issue, but it will take time.
People live longer even though there is currently a significant downturn due to COVID-19 and the opioid crisis, so the liability increases, which no one has figured out. Annuity providers may offer some solutions, but there is a lot of distrust about them due in part to opaque pricing, high fees, predatory sales tactics and the loss of control of the money.
Only 50% of workers have access to DC plans, which is being addressed by state mandates, tax credits and PEPs. However, a patchwork of differing local requirements for a national problem may not be the right solution. These solutions may not address the gig economy or the new way that people want to work.
Critics of 401(k) plans who cite the substantial 1% of GDP cost claim that this money may be better spent on beefing up Social Security, which is still the best annuity plan available, or a mandatory federal solution akin to the Federal Thrift Plan. Portability and economies of scale in a plan run by seasoned professionals may offer some benefits but at the sake of personalization and the ability of employers to differentiate their benefits.
Defenders of the DC system claim that the discrimination requirement makes it equitable for lower-paid workers. Still, if we look at the results, higher-paid workers may enjoy a more significant percentage of the assets, especially when compared to minorities. Though the system may not be rigged, the results become equally important when the government subsidizes it.
So, should the federal government, through Social Security or an omnibus TSP, replace 401(k) and 403(b) plans? Though defensible in theory, the practicality may not hold water. Many employers and people do not trust the government with their retirement plans as priorities shift, and, like with financial services, the government is prone to conflicts of interest.
Perhaps we should acknowledge some of the issues and spend more effort innovating, like we have been doing recently through PEPs, student loan programs, emergency savings plans, retirement income, personalized target dates, managed accounts, HSAs, financial wellness and welcoming, not eschewing, wealth advisors. Along with significant legislative and regulatory strides to improve our retirement system, the industry needs leadership, starting with trusted and less-conflicted advisors who enable plan sponsors to help employees and their organizations collaborate with providers, asset managers and tech companies.
But make no mistake – now that the spotlight is shining brightly on the DC system, the industry will have to answer if results do not meet expectations.