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J. Mark Iwry’s Dispatches from the Pension Wars
The Treasury Department’s pension expert discusses the latest plans for improving retirement income security.
Mark Iwry has spent much of his long career trying to improve retirement security for the U.S. workforce. In his current role as deputy assistant secretary for retirement and health policy at the Treasury Department and a senior adviser to the Treasury secretary, Iwry has led initiatives that most recently include an October regulation on lifetime income options as qualified default options in target-date funds; September guidance on cash balance pensions; and in July longevity insurance guidance on individual retirement accounts, not just company-sponsored plans.
A graduate of Harvard College, Harvard Law School and Harvards Kennedy School of Government, Iwry has worked in government, at Treasury in the Clinton and Obama administrations; in academia, at Georgetown University; and at the Brookings Institution, where he was principal of the Retirement Security Project. Institutional Investor Senior Writer Frances Denmark caught up with Iwry to find out what hes planning next to help Americans save more for their ever-lengthening retirement years.
Institutional Investor: What is the latest front in the struggle to improve retirement security for the American workforce?
Iwry: Treasury and the Internal Revenue Service have been continuing to provide guidance on the use of lifetime annuities in 401(k) plans and individual retirement accounts. One key way to try to restore pensions to our private pension system pensions meaning regular retirement lifetime income is to let annuities be offered in plans on an accumulation basis. Instead of just offering the annuity when someone retires, as one of their payout options, the annuity can be an investment that accumulates deferred annuity units as contributions are made, and that turns into an income annuity when the person is ready to take the benefit. This can help overcome individuals resistance to purchasing an annuity by making it an incremental, low-stakes decision with respect to each successive contribution to the plan and by devoting only a fraction of the account balance to the annuity. An in-plan accumulation annuity can also spread the risk of purchasing at an inopportune moment by dollar-cost-averaging the interest rates that determine the purchase price, locking in a series of rates over time.
Having the annuity in a plan also takes advantage of the fiduciary responsibilities of plan officials, their economies of scale and their bargaining power for the benefit of the individual.
And then weve gone further to say that an in-plan accumulation annuity can be offered as a default if it is embedded, for example, in a QDIA [a qualified default investment account, often a target-date fund].
How does the annuity work for people with only an IRA?
Our longevity insurance guidance from July 2014 applies not just to plans but to IRAs. An individual whose employer doesnt offer a 401(k) could use a longevity annuity in an IRA. This is the first time the approximately $13 trillion market for 401(k)s and IRAs has been open to this kind of product, one that would not start paying benefits until the participant reaches an advanced age, such as 80 or 85.
We allowed the longevity annuity into this market because we wanted to make it possible for this to be an option for many Americans, including middle-income folks. And we knew that they did not have access to this when it was offered only on a nonqualified basis outside the huge IRA and 401(k) markets. The market significance of our July regulation is to take this product that has been fairly limited in its use and not well known, because it has been confined to the nonqualified that is, the nonretirement-plan, non-IRA space and to make it something that could be popularized, available to the tens of millions of people who are in 401(k)s and IRAs.
How would an IRA participant access the annuity?
One form of IRA is an individual retirement annuity. A financial institution serving as an IRA trustee would offer lifetime income including an insurance company or a mutual fund or another financial or investment firm that might offer a managed payout solution thats not an annuity but provides a set dollar amount every month for many years to come and with possible enhancements of various kinds. The final benefit would be a stream of income that can be viewed as predictable and reliable.
Some people have lost heart in terms of pushing for better retirement benefits or new plan designs because they require new legislation.
Were not giving up. The goal is too important. As you know, we issued final regulations on defined-benefit cash balance plans recently [on September 19], which we hope will clarify the rules for those hybrid plans. In important respects, the regulations have accommodated the rules to make it easier for sponsors to be able to proceed with those plans. Thats one of the areas where weve been active in relation to defined benefit pensions.
Were also trying to get the DB into the DC, as you know, DBifying our 401(k) system, if you will. It is easier in many ways to encourage 401(k)s to incorporate some of the virtues of the defined benefit pension, some of the attractive attributes that make us particularly fond of defined benefit plans. And the lifetime income we were talking about earlier, the lifetime income, is an important part of that effort.
After automatic enrollment in 401(k) plans, automatic escalation of employee contributions and now longevity annuities, whats next in the DBifying of DC plans?
Weve been calling the aggregate of good 401(k) automatic features and practices 401(k) 3.0, because they go beyond the do-it-yourself 401(k) of the 1980s and 1990s 401(k) 1.0 and the rudimentary 3 percent automatic enrollment of new hires 401(k) 2.0. All of that is part of an overall fabric thats designed to be responsive to the decline of the defined benefit pension. On one hand, were trying to keep the defined benefit pension alive where we can, and nurture it where we can. On the other hand, were trying to reincarnate it within the much more active and growing 401(k) plan.
Another guidance item that wasnt much noticed allowed disability insurance in a 401(k). A valuable attribute of DBs is disability benefits, in addition to lifetime pension annuity benefits, universal coverage, risk-bearing by the employer and not as much forced on the individual. All of those things were trying to introduce into the 401(k) in a voluntary way at the employers option. If employers want to, they can make their k a much more powerful vehicle for retirement savings and security.
The changes to retirement benefits are often only available to workers at larger employers. What is happening at the small end of the market?
Many of these strategies are now filtering down to the smaller market. The vendors that sell a lot of these plans are stressing automatic enrollment to get the full participation of the workforce. This reached especially the lower-income people, who usually wont participate on their own unless theyre defaulted into the plan. We seem to be getting more investment lineups that are more reasonable and user-friendly, hopefully with lower fees. And in the nonplan space, where people dont have access to a plan at all, there are two major steps from the administration.
One, the president has continued to propose something that would approach a much more universal coverage of retirement savings, that is, it would dramatically expand coverage by having employees who dont have access to an employer plan automatically enrolled into payroll deposit IRAs. They would have low-cost, simple investments, one default investment and a couple of alternatives, and employers would get a tax credit. It is quite efficient and low cost. But it will take legislation.
What is happening more immediately?
Weve gone ahead at the administrative level this does not require legislation with the myRA [My Retirement Account] initiative. This puts on the table for those without access to an employer plan an arrangement that involves no cost for the employee, no fees, a totally safe U.S. savings bond backed by the full faith and credit of the U.S. No confusing menu of investment options. Theres only one investment in this starter account, and its held in a Roth IRA, providing an easy, simple option to get the nonsaver started into the saving habit. Thats something were proceeding with. Were going to start implementing it very slowly and carefully at the end of this year.
How will the myRAs work?
Were excited that were able to put this option into the market. Employers that want to make these Roth IRA savings bonds available by payroll deduction can let their employees just say, Id like to save X dollars of my paycheck every pay period to go into savings in one of these IRAs. That employer would also have virtually no costs, just the minor administrative task of telling the employees they have this option and letting them sign up with Treasury for it.
Once people get into the habit of saving, once they get comfortable dipping their toe into the water here and accumulating some assets for the first time, they could roll over to private sector IRAs. If they hit a level of $15,000 of accumulation in a myRA, they would roll over tax free to Roth IRAs in the private sector.
What are your plans for rollout?
We want to make sure that we have figured out exactly how best to implement it, working closely with a selected group of employers. Over the coming weeks and months, Treasury will work closely with this small group of participants to get feedback and ensure that the user experience is as simple and straightforward as possible both for employers and employees. Were beginning to very carefully let a select number of employers various employers that have volunteered to do this make myRA available to their employees who are not eligible for a 401(k). A lot of these are small employers that dont have 401(k)s.
Some people feel a 100 percent Treasury bond investment is not the best way to build a nest egg.
Its only a starter investment. Were all in favor of using the modern-portfolio-theory approach to investing the QDIAs within 401(k)s that have diversified investments and give people a chance to combine safety with growth potential. But for the nonsaver whom we want to transform into a new saver, the idea of a very safe option through the myRA, a savings bond that has no downside, with value that will never go down, only up, seemed to us to be an attractive option to put out there for folks who are interested in starting to save.
Follow Frances Denmark on Twitter at @francesdenmark.
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