Congressional and financial leaders need to act now to address the nation's "inadequate" retirement savings system to stave off threats to America's economic strength, competitiveness and future prosperity, a top Fidelity Investments executive said today.
Addressing the U.S. Chamber of Commerce's 7th Annual Capital Markets Summit in Washington, D.C., Ronald P. O'Hanley, president of Fidelity's asset management and corporate services department, said leaders need to make "significant reforms" to the U.S. retirement savings system to best avoid the "serious crisis" of ever-increasing numbers of Americans heading toward retirement with little hope of keeping their standard of living over the course of a retirement that could last 30 or more years.
"If tens of millions of Americans reach retirement with insufficient savings, the impact on our citizens, our economy and our national security could be catastrophic, and not something we could solve for most retirees after the fact," O'Hanley said.
Many key retirement savings risks that used to be assumed by employers under the old defined benefit system, such as savings adequacy, longevity, asset allocation and investment management, have now been shifted to the individual, who typically is not well-equipped to make investment decisions of such magnitude, O'Hanley added.
While more than $19 trillion is now invested in total U.S. retirement assets, representing 36 percent of all U.S. household assets, Fidelity research shows that nearly four in 10 retiree households do not have sufficient income to cover their monthly expenses, O'Hanley said.
Other challenges include 35 percent of all working Americans having no access to an employer-sponsored retirement plan. As people are living longer, plan sponsors are moving to close their defined benefit pension plans or limit coverage as a result of rising pension liabilities, O'Hanley said.
Financial literacy is also an issue, as well as proposals such as Simpson-Bowles that have lumped the "tax deferral" element of retirement savings in the same bucket as the "tax breaks" of home mortgage deduction and employer-sponsored health insurance, and propose to cap or even eliminate them all in the name of deficit reduction, further challenging retirement savings, O'Hanley said.
Even though the Pension Protection Act should be considered "one of the greatest achievements of the past decade," O'Hanley proposed that three extensions be required — the increase of the default savings rate to at least 6 percent; requiring auto-increase programs to be part of plan design, unless employees choose to opt out of participating; and Congress mandating these auto features, along with a participant opt-out, in all new plans.
In terms of the 35 percent of private sector workers who either don't have access to a workplace plan or are not enrolled in one, leaders also need to "simplify and streamline the savings vehicles that exist today to make them easier to use and more cost-effective for employers to offer," O'Hanely said.
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