The Retirement Report, Summer 2018
VOL 1 | NO 2
The forum, “Modernizing the U.S. Retirement System—Aligning Policy With Reality,” included discussion on bridging the gap between Americans’ lifetime retirement income needs and a retirement system that hasn’t kept up with demographic and economic trends, personal savings rates, and other developments in recent decades. The event was streamed live on the Academy’s Facebook page, where nearly 400 individuals watched the forum during the event. The video recording of the forum and the slide presentation are also both available via the Academy’s homepage.
“Traditional retirement policy needs to be revisited and updated with an eye toward addressing longer lives, an aging society, employer concerns over fiduciary and financial risks, increased individual responsibility for managing retirement income, and other challenges facing current and future retirees,” said Academy Vice President, Pension Josh Shapiro, who greeted forum attendees. “The Academy stands ready to contribute its expertise in an effort dedicated to helping realign public policy with today’s retirement realities.”
The forum presenters were Steve Goss, chief actuary of the Social Security Administration; J. Mark Iwry of The Brookings Institution and visiting scholar with the Wharton School, University of Pennsylvania; Steve Vernon of the Stanford Center on Longevity; Ted Goldman, the Academy’s senior pension fellow; and Lori Lucas, CEO of the Employee Benefit Research Institute. Attendees from congressional offices, government agencies, nonprofit organizations, and academia were able to have an open dialogue about the current U.S. retirement system—what’s working, what isn’t, and legislative and regulatory options to update and improve the system.
Goss set the stage for the forum with opening remarks framing how the current and future benefits provided by Social Security fit in the bigger retirement income picture, and describing the program’s financial condition. According to Goss, it’s important to educate the public to understand that, while changes are needed, the program continues to be strong and will likely play an integral role in delivering retirement benefits. He outlined some solutions to bring balance to the program. Lucas detailed key trends that have led to gaps between retirement policy and secure retirement income, and moderated the panel discussion and Q&A sessions.
Iwry, with his years of front-line experience as senior adviser to the secretary of the Treasury as well as serving as deputy assistant secretary, lead a discussion of employer-sponsored retirement programs. He made observations on what has worked—e.g., automatic enrollment, Qualified Default Investment Alternatives (QDIAs)—and the challenges of getting policy passed through Congress. Iwry framed the discussion from the past to the future as he identified a number of ideas that have been discussed or are under discussion, but have not yet been implemented. Some of the ideas he shared included optimizing the use of Qualifying Longevity Annuity Contracts (QLACs), adding more flexibility in choices to convert savings into lifetime income, minimizing leakage from the retirement system prior to retirement, and reassessing the required minimum distribution rules.
Goldman focused on the preparation phase of retirement—addressing access to retirement plans, saving appropriately, minimizing leakage of savings prior to retirement, investing wisely, and covered ways to optimize the effectiveness of defined contribution plans, as well as incorporating behavioral science concepts into retirement programs. An example is advancing on the success of auto-enrollment and auto-escalation features according to a personalized plan.
Each participant could be auto-enrolled at his or her specific savings rate that reflects their current age, income, savings, and retirement goals. This calculation could then be refreshed throughout an individual’s working lifetime to assure they are always on a path to a secure retirement. Personalized auto-features could also be applied to create an appropriate drawdown strategy as well. Goldman also emphasized the importance of utilizing pooling features in retirement plans. Similar to other insured risks, few individuals can readily assume all of the risks related to retirement. He presented ideas to pool longevity and investments inside employer-sponsored retirement plans through hybrid-type designs.
Finally, Goldman introduced a twist on the open multiple employer plan (MEP) concept. The open MEP that is included in several proposed bills before Congress, would allow unrelated employers to band together in a common defined contribution plan. In such an approach, a plan would cater exclusively to retirees, creating an unbiased retirement service provider to assist retirees with a broad scope of financial services.
In the program’s final segment, Vernon addressed the issues faced during retirement. He proposed a menu-driven approach that could facilitate retirement income portfolios. Employers, with the protection of a safe harbor, could offer well-constructed menus that a retiree could select upon retirement. This approach simplifies the choices at retirement and helps direct retirees in a positive direction. An example could be a default QDIA that includes a drawdown strategy. He also emphasized the importance of educating workers about the value of working longer (for those with a choice) as an important strategy to entering retirement confidently. Finally, he reinforced the importance of behavioral science. Simply renaming some of the terminology used in the Social Security program could help individuals make better decisions, he said.
Lucas summed up the day and moderated a lively Q&A period that included both those present in the room and online. She reiterated that aligning retirement policy to allow adoption of the ideas, concepts, and features that were presented could significantly move the needle with respect to retirement security.
Shapiro brought the forum to a conclusion. “Making policymakers aware of the options to bring the retirement system up to date, with careful consideration of the potential implications for retirees, taxpayers, and other stakeholders, is a priority for the Academy and could help our society better meet lifetime income needs going forward,” he said in closing. The Academy has started a hashtag on Twitter—#ModernizingRetirement—as one way to continue the important dialogue that was started at the meeting. Other plans are underway to leverage the material presented and keep retirement security as a clear priority for the Academy.
The Academy testified Aug. 15 before the U.S. Department of Labor’s (DOL) Advisory Council on Employee Welfare and Pension Benefits (the ERISA Advisory Council, or EAC) on “Lifetime Income Solutions as a Qualified Default Investment Alternative (QDIA)—Focus on Decumulation and Rollovers.” Senior Pension Fellow Ted Goldman, accompanied for Q&A by Tonya Manning, co-chairperson of the Academy’s Lifetime Income Risk Joint Task Force, presented to the council and responded to questions. The written testimony and presentation are posted on the Academy’s website.
The testimony highlighted the Academy’s lifetime income position statement, provided insights about Qualifying Longevity Annuity Contracts (QLACs), and described an Open Retiree Multiple Employer Plan (MEP) concept. In addition, attention was brought to the full body of issue briefs and related deliverables developed by the LITF, the Actuaries Longevity Illustrator, and the Academy’s online lifetime income quiz.
The EAC’s stated objective on this issue is to focus on recommendations promoting lifetime income within defined contribution (DC) plans through providing further guidance on an annuity selection safe harbor and modifying the QDIA rule to focus on asset accumulation and decumulation issues in the context of lifetime income needs and solutions.
Citing the lifetime income position statement, the Academy presentation noted support for policy and educational initiatives that increase the availability of retirement income options within employer-sponsored DC plans, stating that “such options, based upon actuarial principles such as longevity pooling and other risk mitigation strategies, can help retirees manage their financial security over their remaining lifetime.”
The presentation noted several critical components required by this approach—education throughout the participant’s working career; income options that meet retiree needs; and new legislation and expanded guidance. In addition, employer-sponsored DC plans can provide additional benefits to the retiree, including, pricing efficiency, ease of transaction, provider and product due diligence, and guidance on retirement income planning and longevity risk management options.
The Academy testimony also offered perspective on QLACs, noting several advantages—and reasons why they have not gained popularity—while outlining steps that could be taken to improve their utilization, including through regulation or legislation, allowing variable/index-based returns, eliminating unisex pricing and allowing aggregation among DC plans; modifying annuity selection safe harbors in order to remove fiduciary concerns; and greater consumer education, including efforts by the DOL.
July 31 was the deadline for comments on exposure drafts of proposed revisions of three pension actuarial standards of practice (ASOPs)—No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions; No. 27, Selection of Economic Assumptions for Measuring Pension Obligations; and No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations.
The response to these exposure drafts was particularly robust; the Actuarial Standards Board (ASB) received about 100 comments in total for the three exposures. The ASB has always welcomed and relied upon comments received as a part of its rigorous standards-setting process when revising, approving, and adopting ASOPs. As always, comments received have been posted on the ASB website to encourage transparency for all stakeholders.
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