In the midst of the first 100 days of his administration, President Donald Trump is moving forward on many of the promises he made on the campaign trail. But if the goal is to make America great again, he must make sure that America’s largest demographic doesn’t end up living below the poverty line.
With a retirement crisis looming, it is remarkable that system reform was not at the forefront of the campaign or is yet a priority for the new administration.
An Imminent Retirement Crisis
To stave off a generation of retired poor, the government needs to overhaul the retirement system to make it easier for people to invest for their future and accumulate more capital before leaving the work force. Instead, the only sustained rhetoric coming from the Hill these days, concerns cutting Social Security benefits.
If ignored, the approaching retirement crisis could create a social burden that will overwhelm the government’s ability to shoulder it. Rising life expectancy in concert with a low investment return environment is forcing savers to contribute a greater share of their incomes to retirement and has made it more difficult to retire at any age.
The retirement system was designed for retirees who would need just a few years of financial support. It is woefully inadequate to meet the needs of today, when about 50% of the population will live to at least 90. In fact, the Melbourne Mercer Global Pension index rates the U.S. retirement system a mediocre 14th out of the 25 countries that it surveys.
Fine-Tuning the System
Instead of raiding entitlement coffers and making it harder for current and future savers to finance their retirements, the administration should look for practical ways to bolster the current system and act quickly.
The following modifications would provide U.S. savers with the tools to enhance their retirement readiness:
- Remove the annual tax-deferred contribution limits on retirement accounts in favor of lifetime caps. Allowing people to maximize their contributions when they have the greatest disposable income should increase total investment capital over time.
- Limit pre-retirement distributions. Since too many people use their retirement accounts as the financing option of last resort, limiting distributions to retirement, death, or permanent disability should improve overall retirement preparedness.
- Make minimal contributions to retirement accounts vest immediately. By allowing the matching retirement contributions provided by their employer to vest earlier, workers moving to new opportunities won’t leave critical funds on the table.
- Ensure that every worker has a retirement account with an entitlement to future benefits. This should include a minimum level of retirement benefits above the poverty line for low-income earners. The offering of 401(k) plans by large employers has led to greater retirement preparedness, so the administration should help small businesses provide retirement by lowering the costs and administrative burdens of providing retirement plans, offering financial incentives and by making it easier for them to join multiple employer plans.
- Eliminate means testing. Doing away with means testing would allow people to use retirement benefits to supplement income from a full- or part-time job without incurring a penalty or a reduction in Social Security benefits, allowing them to keep working after the maximum retirement age.
- Allow retirement investments to grow through retirement. The administration should support increased labor force participation for those who want or need to work in their old age. Currently, retirees who reach 70½ must take mandatory minimum distributions from their accounts that could otherwise continue to grow after they stop working.
In addition to incorporating some quick wins, the administration should look to other countries that have designed a retirement system that earn high marks for adequacy, sustainability, and its ability to protect the interests of retirement savers.
Rolling Back Regulations
In his first 100 days, the president has pledged to do away with many government regulations, including the Department of Labor’s new fiduciary rule. The rule automatically requires all financial professionals who work with retirement plans or provide retirement planning advice to act as a fiduciary. That means they are legally bound to put the interest of their clients above their own or that of their firm.
Rolling back the DOL’s rule sends a horrifying message to the market. It says the interests of investors are not paramount relative to those of investment firms or finance professionals. Although one overarching standard for all investment advice might be a better solution, completely abandoning the intention of the DOL’s fiduciary rule is a calamity for those looking to increase ethics and trust in the investment industry.
Investor Due Diligence
If the DOL rule is discarded, retirement investors will have to perform their own due diligence to ensure the primacy of their interests when receiving investment advice. When evaluating a current investment professional or a prospective hire, investors must be thorough and ask a variety of tough questions in order to find a true partner in achieving financial goals.
In addition to asking about fee arrangements, potential conflicts, and how those conflicts might be mitigated, investors need to evaluate the transparency of business processes, how candid and open an adviser is, and how a firm demonstrates integrity to clients. Investors should ask whether their investment advisers must act as fiduciaries, determine the ethical framework under which professionals are guided, and look for credentials that require extensive training, experience, and adherence to a professional code of conduct like the Chartered Financial Analyst designation.
To help investors determine what questions to ask and how to for ask them, the Future of Finance Initiative at CFA Institute created “Realize Your Rights.” The questions inside correspond to each of the investor rights and should help investors determine whether those they hire are willing to put investor interests first and are committed to the ethical principles required to achieve their goals.
There is much that the administration can do to fix the system and that investors can do to ensure a more secure retirement. However, it is doubtful that in the first 100 days, retirement reform will receive the notice it deserves.
In the meantime, it will be up to investors to take control of their retirement plans and demand a high standard of care for their retirement investments.