Despite what we hear from uninformed politicians, conflicted lobbyists, the pandering mass media and most of the 401(k) industry, the biggest obstacle to solving the retirement crisis is the lack of engagement among the senior management at companies that sponsor retirement plans.
To understand better, let's review the philosophy behind and the history of the dramatic and relatively quick shift to 401(k) plans.
Though defined-benefit pension plans are great because of the financial security they provide, the truth is that even at their height of popularity, less than half of the American workforce had access and less than 20% of employees stayed at one job long enough to qualify, according to Dallas Salisbury, former head of the Employee Benefit Research Institute. In addition, pension plans may have been an artificial drag on innovation because many workers stayed longer at jobs or took less appealing ones to get a pension benefit.
When 401(k) plans became popular at the expense of DB plans in the 1990s, the risks appeared to be minimized because of a booming stock market and the freedom their portability gave workers, who could carry their assets from job to job. Reality hit as the market crashed, rash and uninformed investment decisions were exposed and outrageous fees came to light in an industry fraught with egregious conflicts of interest, not to mention leakage and orphan accounts.
Though the 401(k) industry has made huge strides with better plan design, more assets in professionally managed accounts like target-date funds, greater transparency resulting in more reasonable fees, and fewer conflicts of interest among fewer bad actors, we have a long way to go to provide anything close to the financial security that pension plans provided.
The impediment to an improvement in retirement security is perhaps not what the public would expect: unengaged senior management at companies sponsoring 401(k) plans. As a result, company resources and focus are limited, most staff members are poorly trained and stretched thin, plan design is lackluster, there is an unreasonable focus on fees, and there's a lack of innovation and creativity, which cultivates lemming plan advisers focused on the "Three Fs" — fees, funds and fiduciary services.
But who can blame senior managers whose primary goal is to make sure their company survives and grows while delivering healthy profits? No senior manager has ever gotten fired because the 401(k) sucks.
So how can we incent CEOs, COOs and CFOs to more pay attention to their defined-contribution plans?
MassMutual has tried to do this with its Viability program, which shows the bottom-line impact of older workers unable to retire on time. That could certainly hurt companies — in five to 10 years. At which time the senior managers likely will have moved on, along most of their job-hopping staff.
What about financial wellness? Isn't a more financially confident staff less stressed and more productive? Maybe, but few if any wellness programs have shown dramatic and sustained improvements in behavior or bottom-line impact. Good prospecting technique though.
But there is hope. With unemployment rates expected to hit historic lows this year in a booming international economy, the biggest impediment to growth is the ability to hire and retain talented staff. Millennials not only know that they will never get a whiff of a DB plan, very few believe that Social Security will be around when they retire. That makes 401(k) plans the only game in town.
I'm not saying 401(k) plans are the most important factor in recruiting and retaining younger workers. The work environment, lifestyle, compensation, time off and health care may be more important. But a great 401(k) plan in which their peers have accumulated a ton of money could tip the scales, other things being equal.
And creating a great 401(k) can mean less work and liability, while not necessarily costing very much more. The magic of 401(k) plans is that companies can use participant money to make improvements, although a healthy match may be in the employer's best interest.
Recruiting and retaining talented employees will not always be critical, especially when the economy tanks. But until then, using relatively rich and creative retirement benefits to keep and attract workers is the best selling point I can think of to motivate the currently disengaged senior managers focused on near-term growth and profits.