Ronald P. O'Hanley is president of asset management and corporate services for Fidelity Investments, the huge Boston-based provider of employer retirement plan services to roughly 20 million people. Last week, he gave a speech in Washington at the "Capital Markets Summit" sponsored by the U.S. Chamber of Commerce. I know, another droning, predictable paean to the virtues of free enterprise and the marvelous retirement industry in which Fidelity plays such a major role.
Only it wasn't. It was, instead, an aggressive and unequivocal wake-up call. Think Churchill talking about manning the retirement barricades. Unless a lot of people begin changing their ways, and changing them soon, O'Hanley said, the nation will not be able to avert a "looming catastrophe" in the retirements of millions of baby boomers who are now headed for destitute financial futures and old ages spent in poverty.
Such an outcome, he stressed, would have a disastrous affect on everyone in the United States, not just the elderly. "If tens of millions of Americans reach retirement with insufficient savings," O'Hanley said, "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."
"I'm not sure what would be worse," he added, "millions of elderly unable to house and feed themselves … or the intergenerational strife that surely would erupt if young people are forced to lower their standard of living to pay for our failure to act in a timely manner to avert this crisis."
After a three-decade transition from employer-funded pensions to employee-funded, self-directed retirement accounts, the nation's private retirement system is widely acknowledged to be failing millions of Americans.
"Our own research at Fidelity shows that nearly 4 in 10 retiree households do not have sufficient income to cover their monthly expenses," O'Hanley said. "Well over half of all Americans have less than $25,000 in total savings, not counting the value of their primary residence or pension plans. And 28 percent have put aside less than $1,000."
And these are the people who have access to an employer-sponsored retirement plan. More than 1 in 3 working Americans don't even have that, including the federal tax deferrals and often the employer contribution matches that plans offer.
What's even worse about these woefully inadequate savings, he explained, is that they will be relied upon to fund ever-lengthening retirements courtesy of otherwise celebratory longevity gains. "Most demographers believe that the first person to live to 150 is alive today!" O'Hanley said. "Think about funding that retirement."
Lastly, he cautioned, the United States is a nation with low levels of financial literacy that makes it difficult for many people to understand how to live within a budget, save and invest for the future. "In our schools," O'Hanley said, "we teach children about sex and drugs but not about money."
One relative bright spot, he noted, has been the substantial improvements in retirement-plan participation and contribution levels spawned by the Pension Protection Act of 2006. These changes have been driven by the adoption of new rules aimed at changing employee savings and investing behaviors. Participation in plans is moving from being voluntary (opt in) to, in practical terms, involuntary (opt out). Target-date funds have soared as plans stress or actually mandate default investments.
To help put retirements back on track, O'Hanley had four recommendations, including three extensions of the Pension Protection Act:
1. Boost default savings rates from 3 percent to 6 percent. That's a concession to reality, as even 6 percent is still too low. The goal should be 10 to 15 percent, including employer matches. "Australia, home of the world's most successful private retirement system, has a combined employer/employee contribution of 18 percent, and moving soon to 20 percent," he noted.
2. Savings rates should be automatically increased over time and the law should ease or remove barriers to employers that discourage them from providing such behavioral changes and, often, the assertive advice needed to successfully implement them. "Automatic annual-increase programs are the single most effective driver of employee contribution increases," O'Hanley said.
3. Strengthened automatic plan features should be mandated in all new plans by the government. "We all hate mandates," he told the Chamber business audience, "but these simple features cost the employer nothing incrementally and are proven drivers of retirement savings."
4. This suggestion applies to people who don't have the choice of participating in an employer retirement plan, and I like this idea a lot: Let anyone contribute to an individual retirement account—not just workers—and let them contribute at any age. "We should enable IRAs to be opened as early as birth," O'Hanley said, "and without the requirement of earned income."
"Allowing parents, grandparents, godparents or anyone else to contribute early on to a young person's account, coupled with added years of potential compounded returns, would be an enormously powerful tool for generating retirement savings," he said.