A recent white paper by Russell Olson and Douglas Phillips, investment officers at the University of Rochester endowment, argues that its time to blow up the 401(k) plan and replace it with a new system—“Trusteed Retirement Funds”.
From Main Street:
The researchers say it’s time to simplify the system, noting that over 40 years more than 14 variations of employer-sponsored defined contribution (DC) retirement plans have evolved, including 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, Roths, Keoghs and more.
“Their proliferation has been complex and bewildering. Each has its own deduction or contribution limits, distribution restrictions, and nondiscrimination rules, and there are many variations of each vehicle,” Olson and Phillips write. “Some are available through employers, others not. Some workers have retirement assets in multiple DC plans as they change employers. While the details for each vehicle seemed to make sense when created, the resulting rules and options can be confusing for many workers, and this confusion can lead to insufficient or poorly invested savings.”
“Without radical reform, our nation will have a rapidly growing percentage of impoverished elderly in need of government support,” they say.
Citing the examples of countries with successful retirement strategies, the authors note that Australia, Denmark, Netherlands and Switzerland all mandate high-percentage employee deferrals to savings plans – without offering an “opt-out” choice.
“We don’t believe Americans would agree to the mandating of large pension contributions in addition to what we already contribute to Social Security (through FICA taxes),” the researchers admit. “But we believe we can best meet the challenge by establishing high levels of retirement contributions by employees to Trusteed Retirement Funds, from which employees have the right to opt out. And by adapting the best of Australia’s superannuation concepts, we can sharply improve the effectiveness of our retirement savings.”
More details of the Trusteed Retirement Fund from Main Street:
The “Trusteed Retirement Funds” would have several key features, including:
– Supervision by a fiduciary trustee with strict requirements regarding investment objectives and fees
– Employee contributions would automatically increase by 1% every time an employee received a pay raise, unless the employee directed otherwise
– At retirement, a portion of the assets would be placed into a deferred annuity to provide for guaranteed income later in life, unless the participant declined the option
Employers would have fewer responsibilities under this new system, and participant education would be mandated – and provided by the government, as it is in Australia.