Making Employer 401(k) Contributions Mandatory

The time has come for employers to make mandatory contributions to defined-contribution plans. Please do not shoot the messenger: We need to address this reality in order to achieve the retirement outcomes needed for Americans.

As a country, we have effectively eliminated defined-benefit pension plans. According to CNN Money, the percentage of workers in the private sector whose only retirement account is a defined-benefit pension plan is now 4 percent, down from 60 percent in the early 1980s. About 14 percent of companies offer a combination of both defined-benefit pension plans and defined-contribution retirement plans.

At the same time, Fidelity Investments recently reported that the average 401(k) balance reached a record $130,700 in the fourth quarter 2021. While this is wonderful news, that amount will not provide enough supplemental retirement income for employees to maintain their lifestyles when they stop working, after taking into consideration increased living costs and projected life expectancies.

The United States’ existing retirement laws, regulations, and structures are producing outcomes that rank low compared with other major countries. Realizing that change is needed, legislators at the federal and state level continue to look for ways to reform our defined-contribution–focused retirement system and increase projected future savings by expanding access to retirement plans and allowing lifetime income products to be part of plans. These efforts are laudable, but they do not go far enough.

In my view, the proposed changes will not translate into accumulating the needed assets to generate satisfactory retirement outcomes for households. We will likely fall short, as increasing access or adding income options does not necessarily equate to actually having cash in retirement accounts when full-time work ends.

What is needed is to mandate having defined contribution plans in place for all workers—both part-time and full-time—and requiring minimum corporate retirement contributions. At the same time, there needs to be an effort to encourage American business to make satisfactory retirement outcomes a key part of compensation planning.

Here are some thoughts on why these mandates are needed:

1. The defined-contribution plan shift.  Over the past several decades, through legislation and regulation, we have moved the responsibility for retirement saving from corporations to individuals. We have put households—already dealing with the high costs of living, including energy, healthcare, education, and housing—in charge of saving enough to provide a future income that will allow them to have reasonable a lifestyle in later life.

At the same time, wages have not increased sufficiently to compensate for the increase in living costs.

The result of this squeeze is that households have not been able to accumulate sufficient savings and benefits to secure their non-working years.

2. Lack of savings.  Due to low levels of savings and resources, more and more Americans will likely depend on Social Security retirement benefits as their primary income source to pay living expenses when they stop working full-time. As we know, Social Security was designed to replace only about 40 percent of the average worker’s compensation prior to retiring. Relying on Social Security as the primary income source will not result in satisfactory lifestyles in retirement.

3. Lack of Social Security assets.  The financial status of Social Security itself needs reform to be sustainable for current and future beneficiaries. This effort will likely put additional pressure on the federal government and workers to contribute more.

4. No way back.  As we have demonstrated over the past few decades, mandating defined-benefit plans for all workers is not feasible from a financial and accounting standpoint for businesses.

5. Covid-19.  Post-pandemic, we have seen that American business needs qualified workers. Recruiting and retaining qualified workers is essential for business success today and in the future. Enhanced retirement savings offerings could helps companies attract the needed workers.

The Idea

Given that we already have a full defined-contribution infrastructure in place, we should find a way to use it better. It has all the major regulations, years of business use, and worker familiarity that come from the program being in place since 1978.

One efficient way to make better use of the defined-contribution plan infrastructure would be to mandate that all employers have defined-contribution plans and contribute a specified minimum amount toward each employee’s retirement. We could mandate a minimum contribution of 2 percent of each employee’s salary and allow for matching of employee contributions above this amount. We could also mandate the vesting methodology for these contributions.

This new effort could be subject to the contribution maximums already in place.

A Stark Reality

As a country, we need to take serious action to improve retirement outcomes for our citizens. Workers just don’t have the capacity to save more for the future—and for the lengthening life expectancies many of us will be lucky enough to experience. There needs to be a larger inflow of savings dollars into retirement plans.

Again, please don’t shoot the messenger, but this funding should come from corporations. It is the stark reality we are facing.

Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the host of the “FinancialVerse Podcast” and the author of The FinancialVerse personal finance books and Today’s Annuities—A Tool to Create Protected Lifetime Income.

From: ThinkAdvisor