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A Retirement System That Works for Workers

Walter Russell Mead

In a new NYT feature, Tara Siegel Bernard explains how hidden investment fees make it more difficult for public and nonprofit employees to save for retirement:

Most Americans who save for retirement at work have 401(k) plans, which are generally offered by companies and must by law provide a mix of prudent investment options. But millions of Americans — public school teachers, clergy members, employees of religious institutions or nonprofits, and some charities — are not offered 401(k)’s. Instead they typically must rely on what are known as 403(b) plans, many of which are more lightly regulated.

As a result, the people who do the most good in the world, spending their careers helping others in exchange for modest paychecks, often get the worst retirement plans. In fact, millions of people who save in 403(b) plans may be losing nearly $10 billion each year in excessive investment fees […]

Named for a section of the tax code, many 403(b) accounts are riddled with complicated, expensive investment products that can cost their owners tens of thousands of dollars, if not more, over their careers. The 403(b) accounts that many workers contribute to are not subject to the more stringent federal rules and consumer protections that apply to 401(k) plans. In fact, of the $879 billion in total 403(b) assets, more than half is not subject to federal retirement plan rules, according to Cerulli Associates, a research firm.

As the US shifts to a new and basically better pension method—away from the defined benefit plans that are bankrupting school districts all over the country, and towards more portable and flexible defined contribution plans where employees are 100 percent vested from day one —it’s necessary to develop an appropriate framework to regulate these plans.

As this article shows, unscrupulous financial firms are not above selling unsophisticated investors on high-fee plans. Ultimately, financial literacy has to become a basic element of the educational system. By the time an American turns 18 and is able to sign legally binding contracts, that person needs to understand how financial markets work, how personal financial products work, the true cost of credit, and the basics of sound financial planning for big life events like retirement. As that happens, fewer people will be hapless patsies for slick-talking financial scam artists.

In the meantime, we need to provide the right regulatory framework to protect the interests of less sophisticated investors suddenly facing an array of options that they don’t understand and that their prior experience hasn’t prepared them for.

Some Wall Street firms, no doubt, are earning big commissions from this business and will fight legislative efforts to introduce more effective regulation. That’s a strategic mistake. One of the reasons the public resists a range of reforms to the dysfunctional public pension system is because they don’t trust Wall Street to give them a fair break. Creating solid protections for individual retirement investors could give people more confidence in the ability of financial markets to manage their retirement savings. That, in turn, will make it easier to make the case that the private sector should have a chance to compete for Social Security and other funds. For Wall Street firms reeling from a barrage of bad publicity, taking the leadership in developing and deploying a safe and fair retirement program is a way to do well by doing good.

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