It’s Time to Teach
If you’re part of the retirement plan industry, you know that defined benefit pension plans have been on the way out for a while now, and are largely being replaced by defined contribution plans.
In 1960, 41 percent (18.7 million) of all private-sector U.S. workers were covered by some type of a defined benefit pension plan1. By 2011, this number had shrunk to a mere 18 percent2. Meanwhile, from 1980 through 2008, the proportion of private wage and salary workers participating in defined contribution pension plans increased from eight to 31 percent3.
As one who has been heavily involved in the area of managing and administering people’s retirement funds and guiding their financial futures, these numbers concern me. As defined benefit plans continue to fade away, only 38% of U.S. workers are actively participating in a 401(k) plan4. With Social Security facing some serious challenges, this begs the question: how do we get people to seriously consider the importance of preparing for retirement? And for the younger generation of workers, how do we help them understand the importance of starting this process as early as possible?
401(k) plans were originally introduced as a supplement to defined benefit plans, and to encourage people to save for their own retirements by deferring part of their earnings into an investment program that is tax exempt until retirement. Sounds like a no-brainer, right? Unfortunately, this practice has been easier said than done. Moreover, the challenge is not just getting today’s workers to commit to saving for retirement, but also helping them understand how to invest wisely.
The Root of the Problem
When it comes to retirement plans, I believe the political leadership in our country means well. What they don’t understand is that passing laws is not enough to solve the problem. In fact, legislation generally makes the problem more complex and burdensome, often forcing people to take sides unnecessarily. As the legislation grows increasingly more complex, it frustrates savers and erodes their confidence that the money they put away will actually be there in the future.
For example, the Employee Retirement Income Security Act of 1974 (ERISA) was initially designed to protect workers by setting minimum standards for most private industry voluntary pension and health plans. However, over time ERISA has evolved into a nightmare of complex rules and regulations that do more to discourage, rather than encourage, people from participating in these types of plans.
And that’s only one example. For the past several decades, government has continually legislated, regulated and added rule after rule in an attempt to educate the American workforce on the need to save. I’m not saying these rules and regulations are bad or even unnecessary. However, I do believe they’re sending the wrong message, and worse, discouraging people from saving for their retirements.
The average saver isn’t educated or trained to understand a financial statement, balance sheets or the complexities of financial markets. Yet we keep passing rules and regulations forcing them to grapple with these issues. With so many complex options to choose from and no understanding of how to evaluate them, more and more workers are simply opting out of the retirement savings process, leaving their futures – and the American economy – in peril.
An Out-of-the-Box Solution
In my opinion, the answer lies not with more rules and regulations, but with more education, and starting as early as grade school.
What if we, as the Benefits Consulting and Financial Services industry, worked with the public and private school systems to teach basic savings principles? What if we started as early as fourth grade and went all the way through high school, educating students on the value – and the need – of saving part of their earnings? When these youngsters enter the workforce, they would have the information and the motivation necessary to make informed choices about their retirement plans.
We can say it’s the schools’ job, or the government’s job. But the fact is it’s not happening at either level. So I’m going to make a bold statement and say it’s time for our industry to step up to the plate and put together some type of educational program designed to start creating a generation of lifetime savers.
What that might look like is wide open at this point. But at the least it’s time we start the discussion. In my next blog, I’m going to suggest some ideas for what we could teach and how to teach it. In the meantime, I hope I’ve piqued your interest in what I feel is a topic of vital importance to our country.
Peter E. Preovolos
President and CEO