The last time we saw major innovation in the retirement space, gas cost 55 cents per gallon, the DJIA was at 600, and Nixon had just resigned. It was 1974 and the legislation known as ERISA established defined contribution (DC) plans as we know them today. Forty years later, the financial services industry and people wanting to save for retirement are hungry for change.
With much of the research and focus on exactly how to prepare for retirement, what clearly stands out is that people need to save more and they need to start earlier. The biggest hurdle for many is basic access – in fact, DC plans are out of reach for nearly half of the US population. And while IRAs are certainly helpful in the grand scheme of saving for retirement, the most crucial element in building a nest egg that will sustain one through retirement is maximizing savings in defined contribution accounts.
With defined benefit plans virtually extinct, the importance of DC savings is even more important. Often, small to mid-size companies just can’t afford to have a plan, much less match contributions for its employees, and are leery of the fiduciary pitfalls. What’s needed to remedy this unfortunate situation is universal coverage. By universal, I mean taking the employer out of the plan sponsor role and allowing employees to make DC investments directly with independent third party providers.
In what the Affordable Care Act did for people not covered by health care insurance for various reasons, the establishment of “retirement exchanges” where people enroll with their plan provider of choice could extend coverage to millions of employees who, through no fault of their own, cannot participate in a plan today. Envision a world where your 401k plan is run by a third party who has all of the fiduciary responsibilities – currently a burden on employers – and where the employer is merely a contributor and payroll processor of deferrals and matches into that plan.
Retirement exchanges could virtually eliminate the problem of portability which is a huge issue for participants as they move from job to job in today’s economy. Additionally, there is a significant opportunity here for firms that can profitably provide plan services to the small to mid-size market – especially if a mandatory contribution element is built into the enabling legislation that’s required.
Standing in the way of this reality is a labyrinth of IRS codes and DOL regulations, which would be no small task to overcome. However, once employers and plan providers sign on to the benefits for underserved participants and the revenue opportunities of a “multi-employer defined contribution” plan provider model, momentum for retirement exchanges will build and exert pressure on DOL and IRS to explore possibilities.
Like the landmark ERISA legislation of 1974, the journey to realize retirement exchanges starts with a vision that industry leaders, regulators and our elected representatives in Washington can all agree on.