DC DOWNLOAD A NEW SERIES ON PUBLIC POLICY AND DC PLANS Changing the Policy Conversation SIX DC STAKEHOLDERS DISCUSS IMPROVING THE RETIREMENT SYSTEM BY DRIVING CHANGE IN WASHINGTON 22 The Participant Winter/Spring 2014 ssga.com/definedcontribution
Public policy plays a central and growing role in shaping defined contribution plans in the United States and elsewhere. Members of the defined contribution community are becoming increasingly active in policy discussions. For example, SSgA is more engaged than ever in advocating for policies that can lead to retirement readiness for DC investors. In recognition of this trend, this issue of The Participant presents the first in an ongoing series of articles about public policy and DC plans. We brought together leaders from across the DC landscape to share their perspectives on public policy and the defined contribution system. THE DC VISION AND THE EVOLUTION OF PUBLIC POLICY Fredrik Axsater Head of SSgA Global Defined Contribution We recognized several years ago that to fulfill our mission statement Together, we make retirement work we needed to deepen our public policy engagement. We are helping to build a system that works for all stakeholders: participants, plan sponsors, asset managers, record keepers and taxpayers. The defined contribution system is in transition. Tremendous research, ideas and THE DEFINED CONTRIBUTION SYSTEM IS IN TRANSITION. PUBLIC POLICY NEEDS TO EVOLVE AS WELL. innovations are positioning the DC system to better support retirement readiness. Public policy needs to evolve as well. Rules that made sense for early iterations of the DC system may hamper its ability to function most effectively in its current role. Today s policymakers have an opportunity to craft rules and guidelines that build on new insights, particularly in the areas of participant behavior and plan design. Most stakeholders agree in general terms about what needs to be done; now we need to work with policymakers to make those changes possible. We support policies that make better retirement outcomes easier, such as those that: Encourage the use of automatic plan features and re-enrollment Provide plan sponsors with the resources they need to help participants increase retirement savings and inhibit leakage Defined contribution plans have replaced defined benefit pension plans as the primary source of retirement income for millions of investors. As a result, public policy engagement has never been more important. We encourage plan sponsors and other stakeholders to join us in this effort. Fredrik Axsater is responsible for advancing SSgA s global defined contribution business. THE ADVOCATE Kelly Driscoll Senior Managing Director, SSgA SSgA advocates for a system that supports greater retirement outcomes. We are focused on building relationships with lawmakers, staffers and regulators so we can become a trusted resource providing insights, research and expertise on defined contribution issues. We are working to initiate and expand the policy conversation in three areas: 1. Save more. We support policies that provide participants with incentives to save for retirement, 23
DC DOWNLOAD facilitate the use of automatic features and broaden access to retirement savings plans. 2. Grow more. Government policies should make it easy for people to invest wisely. We support rules that encourage the use of appropriate default investments. We pursue policies that strike a reasonable balance between minimizing leakage and allowing limited access to funds throughout the accumulation years. We favor cost-efficient investment options such as institutional funds over higher-cost retail alternatives. 3. Make it last. Providing retirement income for life is a new role for DC plans, and it requires new policies. SSgA supports practical approaches for plan sponsors to provide effective in-plan solutions for retirees, including investment and distribution options that recognize increased longevity and capitalize on the advantages of continuing plan participation postretirement. Kelly Driscoll represents SSgA in Washington, D.C. THE RESEARCHER Dallas Salisbury President and CEO Employee Benefit Research Institute (EBRI) Policymakers often ask us how employers can help employees build assets. Our research suggests several practices, including the following: Vest as quickly as is affordable for your organization. The government has effectively encouraged this through nondiscrimination safe harbor rules. PARTICIPANTS DEFAULTED IN AT 6% RATHER THAN 3% HAD MUCH BETTER OUTCOMES UP TO 30% BETTER FOR LOWER-INCOME GROUPS. Default participants to higher contribution rates. We found that participants defaulted in at 6% tended not to opt out significantly more than participants defaulted in at 3%. Those with the higher default contribution rates also had much better outcomes up to 30% better for lower-income groups. Default participants into diversified, rebalanced portfolios. This leads to better results for the vast majority of participants. Offer counseling and advice. This kind of guidance definitively produces better outcomes. Dallas Salisbury frequently testifies before Congress about EBRI s research into DC plans. THE LOBBYIST Mitchell Feuer Founding Principal Rich Feuer Anderson Retirement issues represent an area of true bipartisanship in Washington. The two parties obviously disagree about the role of government and its ideal size relative to the size of the economy. Yet retirement policy tends not THERE S BROAD AGREEMENT IN CONGRESS THAT THE PRIVATE SECTOR SYSTEM SERVES US WELL AND SHOULD BE NURTURED. to be a question of spending taxpayer money or having the government play a particular role it s about writing rules that most effectively promote savings and retirement income in the private sector. There s broad agreement in Congress that the private sector system serves us well and should be nurtured. Both Democrats and Republicans understand that the better the private system functions, the less Americans retirement needs will fall on the federal government s public safety net. Plan sponsors looking to advocate for their participants should know that their representatives in Congress want to hear from them about retirement issues. Policy is made in a political environment: Policymakers due diligence 24 The Participant Winter/Spring 2014 ssga.com/definedcontribution
includes knowing who will support their position and who will oppose it. Partnering with trade associations and other entities can be an efficient way to communicate that information. Prior to founding Rich Feuer Anderson, Mitchell Feuer served as counsel to the Senate Banking Committee. THE CONSULTANT Lori Lucas Executive Vice President Callan Associates As a consultant, I see the ways particular policies help or hinder plan sponsors ability to support participants. I d like policymakers to improve policies in two key areas: 1. Certain aspects of the Pension Protection Act seem to confuse plan sponsors and encourage overly conservative defaults when auto features are used in DC plans. These should be clarified. Consider the nondiscrimination safe harbor rules. They spell out the criteria companies must meet if they don t want to perform nondiscrimination testing under automatic enrollment, such as starting default contribution rates at 3% with step-ups to no more than 10%. Many plan sponsors stick to these guidelines even though they perform testing; they either think the guidelines apply or are taking cues from them even when the defaults under the guidelines don't suit the plan. We need more clarification about which safe harbor rules apply to which companies. 2. We must address leakage. Lawmakers typically target loans, but cash-outs are the more serious problem. One simple way to address this problem is for sponsors to make it easier to roll DC plan assets into a qualified plan; currently it s easier to cash out. If plan sponsors take an active role in speaking about these issues, policymakers will listen. Lori Lucas leads Callan Associates DC business. THE ORGANIZER Lew Minsky Executive Director Defined Contribution Institutional Investment Association (DCIIA) The retirement savings system has made a lot of progress in recent years. The Pension Protection Act of 2006 represented an especially large step forward, by making it safe for plan sponsors to use automatic features and other techniques rooted in behavioral finance. The next step, which we re in the process of taking now, is to figure out how to drive better outcomes using the great tools available to us. For example, we re in the early stages of working through how policy can support DC plans in generating retirement income. One potential obstacle is the uncertainty around fiduciary rules governing plan sponsors selection of lifetime income solutions: What are the implications for the OUR GOAL IS TO CREATE A SYSTEM WHERE THE DEFAULT AT ALL STAGES LEADS TO PARTICIPANTS SUCCESS. fiduciary that makes the selection, and what process does it need to go through to make it? The uncertainty has made plan sponsors less willing to move forward, so we need better guidance. We re working with people in Washington to help them understand situations like these, where policymakers have the opportunity to send messages that lead to more optimal decision making by fiduciaries. Our goal is to create a system where the default at all stages leads to participants success. Lew Minsky is a founder of DCIIA, which brings together key constituency groups in the DC industry. To learn more or to take action, contact your Congressional delegation (contact information is available at www.usa.gov) and reach out to SSgA. 25
This article is from State Street Global Advisors publication: THE PARTICIPANT For more articles like this one, visit www.ssga.com/dc/theparticipant. Subscriptions: To receive print and/or digital copies of The Participant, please email us at definedcontribution@ssga.com or go to www.ssga.com/dc/theparticipant and click on subscribe at the bottom of the page. Feedback: We welcome your ideas, your feedback and your suggestions for questions to include in future participant surveys. Send your suggestions to definedcontribution@ssga.com. State Street Global Advisors is a global leader in asset management, entrusted with more than $2.06 trillion * in assets. As one of the premier investment managers for U.S. defined contribution plans, SSgA has more than 30 years of experience in the DC market with over $280 billion in global DC assets as of September 30, 2013. DC clients rely on SSgA to provide a powerful, global investment platform that offers access to virtually every major asset class, capitalization range and style, including low-cost index funds, a suite of QDIA-eligible target date and balanced funds, and distinct DC share classes. Beyond investment solutions, SSgA provides a dedicated DC client engagement team that assists clients with the on boarding process and the development of thought-leading participant communications. The views expressed in this material are the views of SSgA Defined Contribution through the period ended 12/31/13, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information, and State Street shall have no liability for decisions based on such information. Investing involves risk, including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSgA s express written consent. Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. *This AUM includes the assets of the SPDR Gold Trust (approximately $38.6 billion as of June 30, 2013), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent. DC-1109 Expiration Date: 01/31/15 2014 STATE STREET CORPORATION