Exclusive Interview (Part II): Phil Chiricotti says Lobbying to Replace 401k is “Lunacy”
Here’s the second installment of our four-part interview. If you’ve missed any, click the links below:
Part I: Phil Chiricotti to Retirement Industry: Outsource Fiduciary and combine with HSA or Die!
Part II: Phil Chiricotti says Lobbying to Replace 401k is “Lunacy”
Part III: Phil Chiricotti Offers Surprising Comments on the Fiduciary Standard
Part IV: Phil Chiricotti Sees MEPs as THE Fiduciary Solution for Small Plans
Part II begins here:
FN: Given your position, you have no doubt kept your eyes and ears open regarding the retirement plans industry. There was a recent op-ed piece in the New York Times, authored by one of the architects of Obama Care, claiming America’s current retirement system is a failure and the only way to fix it is to shift the responsibility away from the private system to the government. Do you buy into the premise that the current retirement system is broken? If not, why do you think there’s so much chatter about it being broken?
Chiricotti: Five percent of those working in any profession are competent, including journalists. Unfortunately, skewed articles with sensational headlines have become the norm. Like most anti-DC plan articles, the author has the facts mixed up, including the tax related analysis. Not only are they not broken, but 401k plans are the most successful savings vehicle in history.The growth in coverage, participation, contributions, assets, and account balances is irrefutable. Total DC plan assets, including 401k, 403(b), 457, other DC, and the Federal Thrift Plan, are in excess of $6 trillion, not the $4 trillion generally referenced. The $7 trillion in IRAs is also fueled by DC plan rollovers.
Ignoring the dynamics of low income earners, critics often paint 401k plan liquidity features as a negative, but these features are a huge advantage and one of the primary reasons low income workers participate. Another major positive is the fact that 401k plans do not require annuitized payouts. The states are positioning to reassert their rights and while some of the proposals may provide an income stream that can’t be outlived, many of the payouts will be next to nothing. This is also the worst possible time in history to annuitize an income stream, something the media, policymakers, and academics conveniently ignore. Equities are not without risk, but unlike some of the state proposals, 401k plans provide the opportunity to earn reasonable returns over time.
401k plans are often criticized over participation, fees, disclosure, and investments. While these plans are voluntary, eligible participation is about 75%, fees are not excessive on a collective basis, recordkeeper/TPA margins are non-existent, disclosure has become excessive, and investment menus are subject to far more due diligence than retail portfolios. Target Date type funds have successfully simplified the investment process along with the increased use of low cost passive funds. Critics have not yet figured this out, but the regulators have and that’s why industry rollover practices are under intense scrutiny.
401k plans are, however, not perfect. Given that there are over 500,000 401k plans, some are obviously better managed than others. Americans are not saving enough on a collective basis and the industry should be working toward solutions for expanded coverage (including MEPs and outsourced 3(16) services), lifetime income options, and the elimination of fiduciary traps. Nevertheless, lobbying for the replacement of a cost effective, convenient and efficient savings vehicle that is working well for seventy million people is lunacy.
The chatter you referenced is based on the fact that the misinformed media, left of center academics, those who favor a government take over the private retirement system, and other ideologues are simply looking for new avenues and opportunities to spread their propaganda. Desensitizing one to the facts can be quite effective over time. The concerns over coverage do, however, have merit.
Based on numerous polls, Americans do not view the nation’s policymakers as particularly competent, accountable or trustworthy. While other polls indicate that journalists and the media are also viewed with distrust, the nation’s mobile workforce is quite satisfied with their 401k plans.
FN: Regarding the idea of the government taking over the private retirement system, there have been a number of proposals to this effect. Why do you think the President and select lawmakers are looking at revamping the retirement system? Do you think this is a good idea? Why or why not?
Chiricotti: Workforce dynamics, fiduciary liability and the cost, complexity, and burden of compliance are why small employers shy away from company sponsored retirement plans, the key to savings uptake. To address the need for expanded coverage and increased savings, policymakers have proposed an onslaught of state and federal challenges to the private system. Some mean well and expanded coverage is commendable, but given that policymakers have long been skeptical and suspicious of the private DC system, the end game could be the takeover of the private retirement system.
Executive, state, and federal initiatives have all been proposed. The details are still lacking, but the state and federal initiatives are poised to gain momentum. The trade has foolishly become complacent and these solutions could play a role, particularly in the small plan market. The Federal Thrift Plan is far more competitive than the other proposals. If the Federal Thrift Plan becomes available in reasonably current form, it would dominate the small plan market and eventually move up market.
Harried employers could withdraw from the private system and exchange their flexible and more competitive programs for less competitive programs. In the end, participants may lose, but it could eliminate some short-term risk and burden for employers. Under some proposals, employers may however, unknowingly be saddled with new fiduciary investment and mortality risks in the future.
In addition to reducing the economic security of retirees, government control of a major portion of private plan assets could distort the capital markets. Misallocations of assets stemming from political deals and pet causes could become the order of the day, including impaired state bonds, favored industries, and geographic locations. The national uniformity in retirement standards would likely change from state to state as well, increasing complexity, cost, and uncertainty.
The rules could change at any time and unless safeguards, independent oversight, insulation from political gamesmanship and actuarial reality are part of these new proposals, they could wreak havoc on the retirement system. If the assets were diverted or mismanaged, the purported cure would be worse than the disease. DC plan critics fail to mention it, but on a collective basis, state and local governments have not done a good job managing their own plans. The state plans offered to the private sector could be managed by some of these same officials.
Governmental involvement at the Federal level is also problematic because a long string of policymakers from both parties are responsible for the explosion in federal debt, a crumbling infrastructure, a dysfunctional Veteran’s Administration, and the lack of an energy policy. They are also responsible for a failed immigration policy, a nightmarish foreign policy, and the demise of DB plans, Social Security, Medicare, healthcare, and nation-threatening unfunded liabilities. Additionally, they have failed to rein in the Tort Bar, a huge political contributor that imposes an excise tax on every transaction in the nation.
Having said all this, industry forces fighting coverage solutions like MEPs and outsourced 3(16) services along with the fiduciary standard are providing the government and DC plan critics with the ammo to launch their own solutions, undermine the industry, and eventually take over the private system.Given that most of these programs will not be subject to ERISA, you have to wonder how the DOL feels about losing their oversight role.
Click here to go to the next installment: Part III: Phil Chiricotti Offers Surprising Comments on the Fiduciary Standard – Phil blasts the current status of ERISA and the DOL while suggesting what should be done about it. And, yes, that little thing about the Fiduciary Standard…
Christopher Carosa, author of 401(k) Fiduciary Solutions, will be speaking at CFDD‘s October 15-17, 2014 Advisor Conference on the subject of “Using Proven Psychological Techniques to Motivate Plan Sponsors & Participants to Implement Your Recommendations.” The session will feature an interactive presentation featuring tools mentioned in his new book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know!