Over the past 30 years, the way we save for retirement has come to be dominated by one plan: the 401(k). But the financial crisis and resulting market meltdown showed the 401(k) to be far from perfect. A number of academics and others have proposed either changes to the 401(k) system or scrapping it altogether. Roger Ferguson Jr., chief executive of the investment firm TIAA-CREF, is one of the few financial executives who have backed changing the system. Ferguson's opinion is sure to have some sway. He is a former vice chairman of the Federal Reserve and a member of President Obama's Economic Recovery Advisory Board. As the CEO of TIAA-CREF, Ferguson heads one of the largest providers of retirement plans the go-to accounts for employees of colleges, hospitals and other nonprofit organizations.
Unsurprisingly, his solution is the one his company already sells a 401(k)-like plan that Ferguson says has done a better job of boosting retirement savings than the original. The 3½ million retirement accounts in the TIAA-CREF system have an account that is on average 50% higher than the average 401(k). Ferguson pitched his company's solution to the retirement-savings problem to TIME.
What's wrong with the 401(k)?
The goal of a retirement system should be to help people save safely while they are working, and then to provide an amount of income in retirement that they can't outlive and that is sufficient to their needs. The 401(k) doesn't do that. It was never meant to be the nation's primary retirement system.
How do we know the 401(k) is not working?
Only about 50% of Americans have 401(k) accounts. So not enough people are participating. But even among those that do, the amount of savings that the 401(k) is producing is not nearly enough. The average account has enough to live on for a few years at best, not nearly enough to fund a full retirement.
What should be done to fix the nation's retirement system?
Any retirement-savings system that is to be used by a majority of Americans should accomplish a number of goals. First of all, it should encourage participation. Second, it should help working Americans manage risk by providing the tools needed to diversify their portfolio without overwhelming them with investment choices. Third, built into the system should be some form of objective, non-commissioned advice. And lastly, we need to ensure that once people have hit retirement, they have access to a product that provides low-cost, guaranteed income throughout the rest of their life.
How do we get from what we have now to what you are describing?
The first thing we need to do is to return to a system where the 401(k) is not the sole retirement-savings vehicle. Also, employers have to acknowledge that they have a shared responsibility along with employees to produce safe retirements. Lastly, we all have to realize that there is a role for government to play in creating the right legislative environment that enables workers to enroll in a sound retirement plan.
So how would you design a sound plan?
Every worker would automatically be enrolled in the new retirement system. The only way to opt out would be to show that you already have a retirement plan in place. And workers would be eligible for the retirement system on their first day of work, unlike today, where many companies make people wait a year until they can participate in their 401(k) plan. There would be an individual contribution and company match. Together those contributions would equal somewhere between 10% to 14% of a worker's pay. Our research shows that at that level of savings, you put away enough to generate as much as 70% of pre-retirement income after you stop working. Lastly, a low-cost annuity option would be available to guarantee enough income to meet basic needs.
Right now most people contribute much less than 14% or nothing at all. How would you get contribution rates up? Do you think we need to mandate retirement savings?
I don't think we have to have a mandate. Given the right set of education and incentives, we can get contribution rates up.
Do you think a plan like this could be created?
In higher education, a plan like this already exists, and TIAA-CREF offers it. Our 3½ million participants have on average 50% more in their retirement-savings accounts than in the average 401(k). So unlike the 401(k), our plan works.
Do you think there will be some kind of changes made to our 401(k)-centric retirement-savings system?
I think there probably will be changes. We have an aging population, so retirement security is a hot issue for a larger portion of the population. Second, the recession highlighted the problems with the current system. Lastly, we have a President that recognizes this is an important issue.
What about our financial system in general? You belong to group of executives who have proposed changes to financial regulation. One of the ideas being considered is to create a national financial regulator who is solely focused on consumer protection. Do you think that is a good idea?
I think we do need to do something. It will be a challenge to figure out how a national regulator would intersect with state regulators on consumer issues, but I think it can be done.