Principal CEO: Better Design Can Shrink Retirement Savings Gap
June 23, 2015 by Meg Green
Larry Zimpleman, chairman and chief executive officer of Principal Financial Group, said techniques such as auto enrollment and re-enrollment can help boost participation in employer-sponsored retirement savings plans.
Zimpleman spoke with A.M. BestTV at the International Insurance Society’s 51st Annual Seminar in New York.
Following is an edited transcript of the interview.
Q: What is the retirement and savings gap?
A: We know today that we do have a significant savings gap here in the United States and in many other countries. That savings gap is primarily rooted in the reality that retirement programs such as 401(k) programs, which are so prevalent in the United States, are completely voluntary. Because people sometimes don’t know exactly what the right decision is for themselves and their family, they end up making no decision. That’s where the retirement savings gap starts to occur.
Q: How wide a gap is that?
A: It’s always a little bit hard to know but what I would say is you would see today in 401(k) programs the average employee contribution is about 6% of their pay. Often the employer matches that with another 2% or 3%. Now we have a total combined contribution of maybe 8% or 9% of pay. Just to give you some sense, if that were completely adequate that probably should be more like 13% or 14% versus the 8% or 9% that we see there today.
Q: Do you have a number of people who don’t participate at all?
A: Yes, we do. What we know is about 50% of people participate in some sort of an employer-sponsored plan. Of course, over time they may come in and out of retirement plans. At retirement about 70% of people end up with some form of a private pension from some employer-based program they participated in the past.
Q: What is the solution to that gap?
A: We’ve tried for 30 years to do a lot of financial education: lots of brochures, lots of technology deployed to try to get people to make the right decisions. We’ve had, to be candid, limited impact. What we know today is that if we design the plan in the right way from the start we can get a much higher percentage of participating employees to the right outcome. So today it is about plan design. What it’s really about is using things like auto-enrollment techniques and plan design and, by the way, re-enrollment so those who don’t participate or opt out are re-enrolled next year. We know we have to set the default contribution much higher, say 6% or 8% of contribution, not 2% or 3% like it is today. Ultimately we have to use what are called target date funds, which are funds that are mapped to your time remaining to retirement or perhaps your risk tolerance so that you have a sophisticated and changing investment option that matches the time you’re going to retire.
Q: Is this an international problem or just the U.S.?
A: In some respects I wish I could point to other countries that, perhaps, were doing this a little better. There’s maybe one example but generally this is a problem internationally as well as in the United States. Western Europe, for example, has gone with more government-provided benefits that are proving to be economically and demographically unsustainable or there’s another set of countries, like Chile and Mexico and Hong Kong, where they’ve adopted a privatized social insurance system. But unfortunately when they created those systems the mandatory contribution rate that they established was too low, typically in the 6% to 8% range versus that 13% to 15% that I was talking about earlier.
Q: The Department of Labor is looking at redefining the fiduciary duty of employers when it comes to retirement funds. Would you have any preliminary thoughts on that?
A: That’s probably the biggest issue. If you go talk to any company in the retirement business today or even if you talk to financial advisers who are active in the retirement business and you ask them what’s the current big issue in the industry, they’d say the Department of Labor’s proposal around fiduciary rules. Essentially what these rules are all about is defining the legal liability for either a financial adviser or a company like Principal with respect to our activities when we sponsor a 401(k) program.
The Department of Labor is looking to extend more of a fiduciary legal liability attached to much of the normal services that we provide to a 401(k) plan. We’re very early in this process. It’s probably going to be another 12 to 18 months before we know how this thing is ultimately going to come out. It is an 800-page regulation, if you can imagine that. It is quite complicated. It’s going to take a long time to review the comments and hopefully get to some sort of balanced position ultimately. What we know is these services to plan participants are so critical to getting to the right outcomes. We’d hate to see a new fiduciary rule that would get in the way of our ability to engage with participants and help them make the right decisions.
