Challenges to retirement security are prompting rare phenomenon

Challenges to retirement security are prompting a rare phenomenon: Bipartisanship in Washington

Over the course of the past decade, Americans have faced a wide array of challenges to their retirement security. With obstacles ranging from a decade of ultra-low interest rates that limited their ability to annuitize lifetime savings, to a long period of high inflation that 60% say hampered their ability to save. As such, individuals need all the help they can get if they are to achieve retirement security.

The United States Congress has taken note of these retirement struggles; between 2019 and 2022 they enacted the SECURE Act and SECURE 2.0, two major pieces of bipartisan legislation that sought to increase access to retirement plans and address decumulation. Now Congress is considering the INVEST Act which is set to further enhance retirement savings opportunities for Americans.

Natixis held an interactive panel discussion in Washington, D.C., in mid-February to better understand the issues and strategies policymakers, retirement experts, and industry thought leaders are all focused on. The event provided insight on the issues currently under debate in Congress and what may come next.

Why is retirement security such a challenge today?

Beyond personal savings, retirement security is determined by a wide range of factors that are out of the control of individuals. For more than a decade, the Natixis Global Retirement Index has examined how factors related to finances in retirement, health, material wellbeing, and quality of life will impact outcomes for retirees in 44 developed countries.

Throughout the long-term analysis, one key fact stands out: Large economies, such as the US, France, Germany, the UK, and Japan, consistently face a bigger challenge in ensuring retirement security for millions of citizens than smaller countries, like perennial Index leaders Norway, Iceland, and Switzerland.

Regardless of size, developed countries are finding life expectancy is lengthening while working-age populations decline. In the US, we have reached the peak of “Peak 65,” the period when the tail end of the Baby Boomer generation enters retirement. More than 11,000 people have or will enter retirement every day during this peak between 2024 and 2027¹.

 That proximity of retirement strikes home for “Peak 65” individuals, who are more likely to express retirement-related fears than the broad US population, worrying that:

1. They will go broke trying to cover healthcare and long-term care costs (55% vs. 35%)
2. Their government benefits (e.g., Social Security) will be cut (51% vs. 41%)
3. They won’t have enough money to enjoy retirement (47% vs. 45%)
4. Inflation is killing their dreams of retirement (45% vs. 41%)

But these perceptions are shaping all Americans’ views of retirement: 67% believe inflation is eroding the value of savings; 76% believe growing public debt will result in a Social Security benefits cut; and 78% believe government programs are not taking longer life expectancies into consideration.

What is Washington doing to try to improve the retirement outlook?

There is a pervasive criticism that Congress has become increasingly inactive and partisan in recent years. But, with regard to retirement savings, that is almost certainly not the case.

As previously noted, Congress passed several major pieces of retirement legislation on a bipartisan basis under both President Trump’s first term and under President Biden’s tenure. And, again, late last year, the House passed the INVEST Act.

The INVEST Act, and its underlying provisions, will not become law unless the Senate acts, but the bill could usher in significant retirement savings changes.

Among the INVEST Act provisions is a change to securities law that would allow 403(b) plan participants, those working in the non-profit or educational sector, to invest in a vehicle that they are currently unable to access – collective investment trusts (CITs). We heard why the measure is important from the leading sponsor in the House.

Representative Frank Lucas (R-OK), who has championed the issue, said “Just two months ago, the House overwhelmingly passed the INVEST Act with over 300 bipartisan votes. For a 435-person body, that’s really an impressive statement about the package. . .  it’s about time we deal with our federal securities laws, 403(b) retirement plans should have access to the same low-cost investments as other retirement plans, and I continue to urge my colleagues in the other body to build on the progress that the House has made in passing INVEST.”

Representative Janelle Bynum (D-OR), who has co-sponsored the measure, explained her motivation for working across the aisle on retirement issues, noting that helping Americans build wealth should not be partisan. “After eight years in the state legislature, I knew I wanted to work on bipartisan matters, and generally, when it comes to finances, it is not a red or blue issue,” she said.

What does the financial services industry think about what Washington is doing?

Policy researchers, plan sponsors, asset managers and retirement advisors have firsthand knowledge of savers’ needs and behaviors. While their interests often differ, they are all aligned in supporting and educating lawmakers on how retirement policies may work in practice.

Our Washington panel – including representation from the plan sponsor community, the asset management industry and from Natixis’ business – discussed not only developing retirement policies, but also what they could mean practically for individuals and employers.

The panel first noted the strengths of the current retirement system and the importance of building policy solutions on top of the employer-based plans that are serving many participants well now.

Barbara Marder, President and CEO of the Employee Benefit Research Institute (EBRI), shared “the median replacement rate of pre-retirement income from Social Security and 401(k) plans/IRAs is more than two-thirds. This includes the impact of the SECURE Act that was recently passed that will help to boost plan participation and contribution rates over time.”

The group further discussed pending proposals like the 403(b) provision in the INVEST Act and the practical impact it could have on savers.

Liana Magner, Executive Vice President and Head of Retirement and Institutional at Natixis Investment Managers, said “403(b) plans tend to serve the education and not-for-profit community, so the question is why should employees that work in those sectors not be able to access these same vehicles that people in the corporate world can access? And they tend to be lower-cost vehicles. The savings from lower fees compound over time, leading to higher balances.”

The panel also discussed a rulemaking that is imminently expected from the Department of Labor (DOL) that may expand access to alternative assets in retirement plans.

Lisa Bleier, Managing Director, Associate General Counsel and Head of Retirement at SIFMA, explained the rationale for the proposed rule and how it may be expected to work in practice. “It’s the idea that we should not have to be scared of these things,” she said. “There might be some types of investments that can increase returns. And the ways it is being talked about are small, like access to these types of investments in a target date fund, resulting in a small amount of exposure.”

While expanding the universe of investments available to retirement plans is clearly part of the policy agenda, it is critical to remember that employers who sponsor retirement plans must first and foremost prioritize their fiduciary duty to employees. They must demonstrate rigorous due diligence and cost-benefit analysis before adopting new fund vehicles and strategies.

The nature of a plan sponsor’s responsibility to their participants can sometimes lead to a slower uptake of innovation and a tendency toward lower-fee products. Magner explained this is not always the best option. “There has been a shift to more passive strategies and index funds in plans because they may have lower fees, but lower cost is not always risk free,” she said. “There is a benefit to active management as well as passive management. They both play a role in a portfolio.”

What’s next?

According to Natixis Center for Investor Insight research, Americans may be underestimating how much money they will need in retirement. For example, Millennials, on average, think they will need only $875,000 to fund 20 years in  retirement. In such a scenario, the average Millennial would  be able to spend only $35,000 a year from  retirement savings.

Given these savings goals, Americans are clearly still planning on Social Security to supplement a large part of retirement income. But the sustainability of government benefits is in question and a huge challenge looming for policymakers. According to the Social Security board of trustees, without intervention, the program will only be able to pay out between 77% to 80% of expected benefits as soon as 2033².

Despite these many issues, we left Washington with some reassuring news: Members of Congress are diligently working across the aisle on retirement policy proposals to secure better retirement futures for all Americans. This bipartisan coalition will be needed as they tackle that next big policy challenge.