How can we improve retirement outcomes for future generations of workers in the U.S.? In the second season of my podcast series, “The Accidental Plan Sponsor,” which explores the origins, evolution and trends in employer-based retirement systems, I sought lessons from abroad—examining the systems of Chile, Australia, United Kingdom and Singapore. While each country’s model is unique, six key themes emerged that should inform where U.S. policy may go next:
1. Funded account-based defined contribution systems is where the retirement world is going. Lower interest rates, increased longevity of plan participants and a more mobile workforce means companies don't want to be on the hook to pay lifetime benefits for retirees. Internationally, we see no bucking of the trend toward defined contribution plans—even governments like Singapore, and to an extent, Chile, are replacing their pay-as-you-go Social Security systems with an account-based system like the United States. The shift means workers have more transparency into their investments and the flexibility to make their own allocations, but what is then also needed is more professional asset management and products that provide lifetime income.
2. The debate of a voluntary system versus a mandated system will need to be resolved. Our voluntary system leaves tens of millions of Americans without a workplace retirement savings plan. And for those that do have access, we only see robust participation if a plan sponsor voluntarily implements automatic enrollment. Every country I studied has moved to a system where having a retirement plan is largely required. In Australia, it's mandatory that all workers contribute to a retirement plan. In the U.K., all employers must offer a plan and automatically enroll their members. Individuals can opt out, but most don't. While some U.S. states are starting to require this for most companies in their jurisdiction, the day is coming when the entire country will need to address the coverage gap once and for all.
3. A robust social safety net is necessary for any system to work. Some folks don't spend a full career in the formal economy, and systems that don't provide for residents without sufficient retirement savings will have problems. While Chile had a much-admired system, now many of their citizens are getting to retirement age with meager account balances, and the country doesn't have a robust social safety net to help them. While the U.S. Social Security system isn't perfect, many Americans rely heavily or entirely on Social Security for their retirement income. We cannot forget the important role this plays to provide credibility and trust in any retirement system.
4. The need for professional and institutional investments is vital. Saving for retirement is a long-term proposition. If managed professionally, retirement savings can be invested in diversified—and even illiquid—assets that may provide additional return opportunities. Systems like the superannuation funds in Australia and the Central Provident Funds in Singapore find ways to invest assets institutionally. For various reasons, investment portfolios in DC plans in the U.S. are still pretty simple. When thinking about how to organize a retirement system, it's really important that it's set up in a way that allows for more sophisticated, professional management and access to alternative asset classes.
5. Everyone is still trying to figure out retirement income. This becomes the inevitable challenge when you move from a defined benefit system to a DC system. If everyone has their own pot of money, how can they ensure it lasts for a lifetime? The country that has done the best job among those I looked at is Singapore. They require a certain amount of your account to be spent on a government annuity. While that may be difficult to implement in the U.S., a lot more work can be done to embed retirement income solutions, including guaranteed solutions, into retirement plans.
6. Striking that right balance between the role of government, the private sector and employers is the trick. It’s the question behind the podcast—who should play the role of the plan sponsor? Guests from all four countries I examined told me that large employers, even the government, were moving away from providing pensions, let alone any benefits at all. So others needed to step up. In Chile, they created pension fund administrators or privately-run retirement providers. In Australia, superannuation funds—many either owned by for-profit companies or entities called “for-members,” originally created to serve the workers of specific industries—compete for business by providing good investments, good service and reasonable fees. Similarly, in the U.K., retirement benefits are increasingly being provided by private “master trusts” that serve multiple employers. Singapore is a bit different—there, the government runs the entire program. From looking around the globe, it seems inevitable that the U.S. will move to some combination of these types of plans and away from the employer-based model.
What will work for the U.S. isn't quite clear yet, but by looking beyond our borders, we can see a whole new world of possibilities—vital to the ongoing work to secure retirement for future generations.
Josh Cohen, CFA, is Head of Client Solutions, PGIM DC Solutions. For more information, visit https://www.pgim.com/defined-contribution-US