In a strongly worded speech delivered at the U.S. Chamber of Commerce on Wednesday, Ronald O’Hanley, president of Fidelity Investments’ asset management and corporate services division painted a dire picture of Americans’ readiness for retirement and the implications on future generations.
“I’m not sure what would be worse — millions of elderly unable to house and feed themselves … or the intergenerational strife that surely would erupt if young people are forced to lower their standard of living to pay for our failure to act in a timely manner to avert this crisis,” O’Hanley said.
The Chamber of Commerce’s 7th annual capital markets summit in Washington, D.C., brought together leaders from the business community, the public policy sector, and government to examine the state of financial regulatory reform and address challenges facing U.S. and global markets.
O’Hanley focused on the need to act now to avoid a crisis as ever-increasing numbers of Americans approach retirement without being financially prepared. “This challenge poses a threat as serious as any to the security of America … a threat to the financial security of American retirees, as well as a threat to the nation’s economic strength, competitiveness and future prosperity,” he said.
His remarks weren’t entirely doom and gloom, however. “More than $19 trillion is now invested in total U.S. retirement assets, representing 36% of all U.S. household assets,” he said, adding that “this vast pool of capital not only represents future retirement income for American retirees, it has propelled capital formation for the private and public sectors in the U.S. and around the world on a scale never before seen.”
He outlined a number of challenges facing the retirement system, namely that Americans aren’t saving enough, and that as many as 35% of all working Americans don’t have access to an employer-sponsored retirement plan. He also cited demographics and longevity as a significant challenge, noting that “we are living longer and may need to fund a retirement that lasts 30 years or more — potentially including extra years of expensive health care.
O’Hanley also said that low levels of financial literacy threaten the viability of the American retirement system “In our schools, we teach children about sex and drugs but not about money,” he said. “And, in the workplace, some employers are reluctant to provide financial and retirement education and guidance out of fear of lawsuits, and recent signals from the Department of Labor suggest this fear is well founded.”
He lauded the passage of the Pension Protection Act in 2006, saying “Congress showed great bipartisan leadership in 2006 when it passed the PPA, which was truly a watershed moment for the private retirement savings system.” By making such features as automatic enrollment, automatic escalation and auto-default to lifecycle funds easier for plan sponsors to implement, the PPA “enabled employers to use the power of inertia to put their employees on a better path to retirement security.”
Still, Congress could do more to realize PPA’s potential, said O’Hanley, naming three extensions to the law that could help address the retirement crisis:
1. Increase the default savings rate. “While auto-enrollment has had a major impact on plan participation, the 3% default savings level set by the PPA is too low,” he said. “Policymakers should take steps now to increase the default savings rate to at least 6%.”
2. Require auto-escalation features as part of plan design, unless employees chose to opt out. “Policymakers should further incent employers to adopt auto increase programs by easing fiduciary and testing burdens and essentially expanding the PPA safe harbors,” he said.
3. Mandate auto features, along with a participant opt-out, in all new plans. “We all hate mandates,” O’Hanley acknowledged. “But, these simple features cost the employer nothing incrementally and are proven drivers of retirement savings.”
Register or login for access to this item and much more
All Employee Benefit News becomes archived within a week of it being published
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access