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How we got here: A history of retirement in the United States
next issue no. 11: Fiduciary perspectives
The Defined Benefit Era
Nuveen founded to underwrite public infrastructure projects
Our thoughts on defined benefit plans
It is shortly after 1978 that we see defined benefit plans start to fall away. Companies wanted to push the liability management of full defined pension plans off their balance sheet, and to make the employee more responsible for their retirement assets.
TIAA founded to provide retirement benefits for teachers, TIAA now serves a wide range of individuals and institutions in the academic, medical, cultural, and research fields.
The Social Security Act of 1935 established the Social Security program. The Social Security Act has been amended and expanded over the years to include additional programs and benefits, and was amended in 1965 to create Medicare (for people 65 and older) and Medicaid (for low-income and vulnerable individuals and families). Social Security has become a crucial part of retirement planning for many Americans, providing a stable income stream in their later years.
What we like
Defined benefit pension plans were not without advantages, and some of these we would like to recreate within the modern 401(k) plan. The guaranteed lifetime income of a defined benefit pension provided participants with the certainty of income on top of their social security payments.
What we dislike
However, there were numerous drawbacks with the defined benefit plan. The portability of the assets was limited, with the plans often built on the assumption that the participant would remain with one company for a majority of their career. The defined benefits plans also only ever benefited a relatively small number of people. There were a lot of temporary workers and those who took breaks from employment who were not given access to defined benefit plans.
The creation of 403(b) plans can be traced back to the Internal Revenue Code of 1954. A 403(b) plan is a retirement savings plan available to employees of certain tax-exempt organizations, such as schools, hospitals, religious organizations, and nonprofit organizations.
The Employee Retirement Income Security Act (ERISA) became federal law. ERISA sets standards and regulations for employee benefit plans offered by private employers. The law was enacted to protect the interests of employees participating in employer-sponsored retirement plans, such as pension plans, 401(k) plans, and health insurance plans.
401(k) plans become law. The plan originated as a provision in the Internal Revenue Code, more specifically section 401(k), which was added under the Revenue Act of 1978.
The Modern 401(k) Era
At this point a series of legislative changes were made to Social Security to address its long-term financial sustainability. The reform was prompted by concerns about the future solvency of the Social Security trust funds and the growing number of retirees relative to the working-age population.
Our thoughts on 401(k) plans
What we like
The modern 401(k) era has many benefits for plan participants and sponsors alike. Shifting the burden of managing the assets onto the participant affords much more portability when employees change jobs and allows them to allocate the risk of the portfolio according to their needs. Having tax advantaged accumulation vehicles allows people to see much more clearly how well they are saving for retirement, how much of an asset base they have built up, and with projected returns how much they can expect to have in retirement. It encourages early savings, while allowing younger employees to move between companies and not lose what they have saved.
What we dislike
As much as the 401(k) is an ideal vehicle for accumulation, it does not have a set standard to assist with decumulation. Plan participants are often left confused as to their options when they reach the age of retirement, and there is no inherent guaranteed income within a 401(k).
The Retirement Equity Act signed into law aimed to address gender-based disparities in retirement plans and enhance protections for spouses and beneficiaries. This Act worked to address fair treatment and financial security
Assets in 401(k) plans pass $1T
ROTH IRAs established
The Pension Protection Act creates QDIAs, leading to a huge uptake in target date funds. Target date funds allow for automatic risk adjustment, albeit often based simply on a participants’ target age of retirement. So, while they are relatively simple in overall portfolio rebalancing, they provide risk adjustment over time and allow for growth to transition to income over the life of the portfolio.
The Secure Act Era
Target date funds pass $1T in AUM
What the future holds
While there are elements from the defined benefit era that we want to see make a return to retirement plans, namely guaranteed lifetime income, the drawbacks of the defined benefit era are worth avoiding. Likewise, while the portability and accumulation benefits of the modern 401(k) plan are well-established and worth trying to retain, we feel that we need a solution that enables better decumulation from the basket of assets built during a long career.
We think that an in-plan annuity, that takes some of the accumulated assets built up in the 401(k) structure, and can transfer them into a guaranteed income stream, can present the option that blends the benefit of both solutions. These structures are relatively well established within the 403(b) space but bringing this to the larger 401(k) market can have wide-ranging benefits for a lot of plan participants, while not putting the burden back on plan sponsors.
SECURE Act passed. The SECURE Act was a significant step forward in retirement legislation. It also highlights that fixing America’s retirement crisis is a growing area of concern for Congress, and it has wide bipartisan support. The Act made it much easier for part-time employees to get access to retirement plans, it changed RMD provisions, and opened up a greater use of annuities within 401(k) plans by adding safe harbor provisions.
SECURE Act 2.0 passed. This follow-up piece of legislation continued to build on the SECURE Act. It continued to incentivize businesses to offer retirement plans, included automatic 401(k) enrollment, and further changed tax codes and RMDs to help encourage savings by participants.
In this issue
Any guarantees are backed by the claims-paying ability of the issuing company.
Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association of America (TIAA).
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
This information does not constitute investment research as defined under MiFID.
Please note that this information should not replace a client’s consultation with a tax professional regarding their tax situation. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions.