If you’re paying attention, you may have noticed that America’s retirement savings strategy is imperfect. Thanks to the advent and widespread use of 401(k) plans, the traditional pension plan of old has gone by the wayside for most workers. In a competitive business environment, employers have shifted much of the burden (and some of the cost) for retirement savings and investing to employees.
Left to their own devices, the average American is woefully unprepared for retirement, with a current retirement savings balance of just about $80,000. Retirement plans at small businesses (which make up 49% of all workers) are often nonexistent or burdened with high costs. Employers who establish a workplace plan often face a misunderstood and unwelcome fiduciary obligation to their employees. Administering and monitoring the plan creates costs, headaches and distractions to business owners who would rather focus on their business goals.
So let’s talk about streamlining the retirement savings process. How can we made retirement savings easier, more accessible and less expensive to savers?
Voluntary access to the federal Thrift Savings Plan (TSP) to all wage earners and self-employed workers.
The TSP is the 401(k)-type plan for federal government employees. It is perfectly simple, offering just four mutual fund-like investment options (large cap US stocks, small cap US stocks, international stocks and a bond fund) and target-date funds. It is also incredibly inexpensive thanks to low administrative costs and huge economies of scale. The “C Fund,” which replicates the S&P 500 index, has expenses of just 0.027% (a fraction of even Vanguard’s 0.05% S&P 500 ETF) thanks to fund assets of almost $90 Billion.
The Treasury department/IRS could allow payroll deductions into the plan in the same way payroll taxes are withheld. All businesses would be provided with the option to offer their own 401(k) plan or allow employees to participate in the TSP. Companies could still elect to make matching contributions to employee savings, and retain auto-enrollment benefits if they choose.
Choosing to participate in the TSP would eliminate the need for annual discrimination testing for owners and highly compensated employees. It would alleviate the fiduciary obligation of 401(k) plan trustees and the ongoing costs of plan maintenance and compliance, freeing business owners to focus on their real work. Again, choosing the TSP over a private 401(k) would be optional but likely a very attractive option for most small businesses, many of whom offer no plan due to the costs and potential liabilities.
Create an option in the TSP to buy privately-reinsured “pension” credits instead of investing in stocks and bonds.
Many individuals are simply not comfortable investing for themselves for retirement and might prefer a more traditional pension plan. An alternative could be created within the TSP system to allow individuals to “buy” personal pension credits. While the system would be administered by the Federal Retirement Thrift Investment Board, pension credits would be insured and offered by private insurance companies, similar to buying a lifetime, inflation-adjusted annuity. While investment returns would likely be much lower than a growth-oriented portfolio of stocks and bonds, it may be an attractive option to some. Since the credits would be part of a national system, they would be fully portable if a worker left his/her job.
These changes could potentially alter the landscape of retirement savings. For many, retirement savings would no longer be tied directly to their employer, alleviating rollover headaches if an employee changes jobs. More workers at small businesses could potentially have access to a retirement savings plan through payroll deductions. It’s not a perfect idea, and many will cry foul about having the federal government more involved in an otherwise private-market system, but it’s a place to start a conversation.