Representatives from the Federal Reserve Bank in St. Louis recently discussed on a defined contribution webinar the implications for the retirement industry as a result of the Covid-19 crisis. The key action items discussed were all significant issues prior to the virus’s impact on our economy and markets, but the magnitude of the issues has certainly been exacerbated. Many of the following items have been highlighted in this blog before.
There is an urgent need to address these issues, which include: 1) Americans’ lack of emergency savings, 2) racial and economic inequality in retirement savings, 3) lack of access to workplace retirement plans, and 4) the Millennial cohort. As you can see, there is a host of critical issues just involving retirement savings, let alone all the other issues that are dominating our political and cultural landscape today.
Most of these issues have to do with the fact that a majority of Americans just don’t have wages that provide them with more than enough to just meet their basic needs. As a result, they don’t have funds to meet emergency expenditures. We’ve been reading about this for years how the average American can’t meet a $400 medical or auto expenditure without having to borrow. Even if these American workers had access to a retirement plan, and only about 50% do, they don’t have the disposable income to put money aside.
With regard to inequality, two-thirds of white families have 401(k) plans, while only about 1/3 of nonwhite families are participating in a DC-like plan. For those that are participating in a DC retirement plan, white families have saved on average $155,000, while non-white families have about $60,000, and those figures are from before the recent market sell-off. Trends in the American labor force (on-call arrangements) and the impact of that trend on wages and benefits are constraining one’s ability to save. Nonwhite Americans suffer as a result of the lack of wealth transfers from one generation to the next.
Lastly, as the father of five children (4 millennials), I am particularly concerned about the continuing impact of one crisis after another on this generation. The children of the ’80s and early ’90s have been stung by the burden of excessive student loan debt and the Great Financial crisis, just as they were entering the workforce, which had a profound impact on their starting salaries. At the point where some of this cohort may have just been recovering, they are hit with the Covid-19 crisis. This generation is clearly losing the “birth lottery”. According to recent studies, this generation’s wealth is 34% below where one would expect it to be at this age. Clearly, the implications for the long-term are devastating.
With so many Americans living within 200% of the poverty line, we need to address income inequality, but that might not be enough to help close the retirement gap. We need to rethink the inappropriateness of DC plans as one’s primary retirement vehicle, and once again consider them nothing more than supplemental income funds. If an American has a job, they should be receiving credit towards a defined benefit system. If this needs to be done outside of their employer/employee relationship – so be it! Asking untrained and underpaid employees to fund, manage, and disburse a retirement benefit is a failing policy that is leading to a disastrous outcome.