Mick Jagger turns 70 in July, well past a normal retirement
age, and hes got plenty of company. Each day, 10,000
people reach 65 in the U.S. alone. Unlike Jagger, the majority
have a fraction of what they need to stop working. Ronald
OHanley, president of asset management and corporate
services for Fidelity Investments, says the U.S. faces a
catastrophe if it doesnt address the problems with its
retirement system. Most working Americans have little hope of
maintaining their current living standards when they retire, he
With Social Security under pressure and defined benefit
pension plans on the decline, defined contribution plans such
as 401(k)s are becoming the main means of funding retirement.
Under these plans, employees and employers contribute to
portable accounts that enjoy tax-sheltered status until
retirees withdraw benefits. Boston-based Fidelity is the
countrys largest 401(k) manager, with more than
$1 trillion in retirement assets.
OHanley, 56, joined the firm in 2010 from BNY Mellon
Asset Management, where he was president and CEO.
Senior Writer Julie Segal spoke with him recently
about proposals to limit defined contribution plans tax
advantages and the mistakes that contributed to the retirement
The Simpson-Bowles commission and others have
recommended limiting tax benefits for retirement plans. Why do
you oppose these limits?
First, the proposals are illogical: They dont
raise a lot of revenue. Now contributions and earnings on that
money are allowed to grow tax-free until employees start making
withdrawals from retirement accounts. At
that point, everything is fully taxed as ordinary income.
Limiting the tax-deferred nature of these accounts doesnt
raise revenue; it just shifts revenue from the future to the
present. I would argue it probably moves less revenue forward
than if the government waited until the future, when investment
earnings would likely be greater. If I wanted to be really
unkind, I could call this another form of borrowing or stealing
revenue from the future.
Point No. 2 is, these incentives matter. We have a lot of
data on this because were the largest recordkeeper out
there and we spend a lot of time talking to our plan
participants. We know what drives their behavior. Even people
too young to imagine retirement are still contributing because
they like paying less in taxes right now.
Why fight this battle when people have saved only a
small percentage of what they need for retirement?
Because the more you save, the more youll have when
you want to retire. So the government needs to continue to
provide incentives. Most people focus on investment performance
as key to what theyll have in retirement. Investment
performance is probably the least important of four
People need to start saving as early in their careers as
possible so they can benefit from compounding. Even if money is
compounding at a fairly low rate of return, its still
compounding for a lot of years. Second, people need to save
more. Third is asset allocation; fourth is investment
Target date funds, which are used by the majority of
401(k) plan sponsors as default options, have been criticized
for having large equity allocations and limited
diversification. Can they be made less volatile?
If you look at our target date funds, many years ago we
started adding exposure to commodities and real assets to
increase their diversification. What I would caution you on
with this question is, managing volatility always sounds like a
good thing to do. People are only thinking of it in terms of
managing downside volatility, but when you manage volatility
youre going to manage it on the downside and the
What could the fund industry have done better to get
people to save more?
Education and guidance. We find theres an incredible
lack of understanding of even some of the basics. On an
intuitive basis people get it, but very, very few people accept
that starting earlier is much more important than your
One reason we havent done a better job is that
regulation makes plan sponsors nervous that if they provide
guidance, they are going to be susceptible to a lawsuit down
the road. But another reason is that the technology tools we
give participants are not easy to use, and many are just
boring. Were doing work here on gamification, making
tools available that mimic how younger participants interact
Are high fees part of the problem as
Excessive fees are always a drag on investment return.
Thats the way you ought to think about fees, because we
show returns net of fees. Obviously, if fees were lower,
returns would be higher. Relative to the four factors I gave
you, fees would be five. Youre probably saying, well, of
course Im going to say that; Im the provider here.
But if you look at fees in defined contribution plans over
time, theres been a steady move down, and thats a
good thing for everybody.