Great Gray is Here to Respond to the “Alarm on US Retirement System”

Authored by Jason Levy, Sr. Counsel – Trust and Administrative Services

A recent annual letter to investors from a very high-profile CEO got considerable press for its stark warning about the future of retirement in the U.S. While, to some, the scope of the problem may be subject for debate, it should be beyond dispute that Americans would benefit from improvements to (a) access to retirement plans, (b) accumulation of sufficient savings for a secure retirement, and (c) distribution methods and strategies in retirement.

The CEO’s letter addressed these themes. He contrasted more robust participation in Australia’s retirement system with the United States, where a meaningful number of Americans lack access to a retirement plan. He urged improvements in retirement outlooks through long-term investment strategies. Finally, he flagged the growing financial challenges that correspond to a population that is living longer today and expected to live longer in the future.

Great Gray and collective investment trusts (“CITs”) can play an important role in making improvements in each of these areas.

1. All Workplace Retirement Plans Should Have Access to CITs.

With the recent introduction of pooled employer plans and early successes of state-run automatic enrollment IRAs, there is real momentum to closing the gap in the roughly 27% of Americans who lack access to a retirement plan.

While providing access to retirement plans is a prerequisite, nearly as important is ensuring retirement plans are attractive to their participants. To help achieve this goal, all workplace retirement plans today, and any new types of plans created in the future, should have access to CITs. Doing so will allow all Americans to have access to an investment product that is low cost, well-regulated, and can be used to develop a diversified investment portfolio to support optimal retirement outcomes. Great Gray supports the legal and regulatory changes needed to expand this access, including allowing 403(b) plans – retirement plans for educators, non-profit employees, clergy and others – to offer CITs.

2. Reducing Investment Costs is a Key Ingredient in Accumulating Retirement Savings

The impact of reducing investment costs in improving retirement outcomes cannot be understated. As noted by the United States Department of Labor, over a 35-year career, a 1 percent difference in fees and expenses reduces an individual’s retirement savings by 28 percent. This means that for someone who otherwise would have saved a $1,000,000 by the time of retirement, that person would have lost out on $280,000 in retirement savings – solely by reason of paying excess costs when deploying and otherwise identical retirement investing strategy.

By benefiting from lower regulatory expenses, CITs can provide reduced overall costs to retirement savers relative to mutual funds – without sacrificing regulatory and investor protections. For example, CITs, unlike mutual funds, are subject to the Employee Retirement Income Security Act (“ERISA”), including ERISA’s fiduciary obligations, which have been described by courts as the “the highest known to the law.” CITs selected by retirement plan fiduciaries as investment options in 401(k) plans also are subject to ERISA’s disclosure regime. This regime is tailored to help plan participants make informed decisions in choosing among investment options, including mutual funds and CITs, by providing information about fees, performance, and strategy in a user-friendly format.

3. CITs Provide a Platform for Retirement Income Product Innovation

With the shift from traditional defined benefit pensions to participant-directed defined contribution plans, retirees face the complex challenge of turning savings into lasting income. Many Americans worry about the longevity risk of outliving ones’ savings, and, conversely, spending too little in retirement out of fear of running out of ones’ savings.

Great Gray supports the creation of lifetime income products to help address these challenges, and its CITs are well-suited to support these products. Just as CITs are well-suited to a target date fund structure, the ability of CITs to hold different kinds of underlying investments position them to serve as a strong platform for innovative investment products to distribute income in retirement.

The letter asked a key question for both policymakers and everyday Americans: “Do we have the adequate retirement system in place for most Americans?” Great Gray is working every day to support the path needed to answer “yes” to that question.