Thank you to Jeff and to Latinos for a Secure Retirement for inviting me today to speak at this conference. It is indeed a pleasure to be here today on this panel to provide a consumer perspective on technology issues that relate to retirement.
However, before I get into technology issues, I want to make a few broad points. The first is that people need to have a secure retirement and, sadly, technology can’t fix that issue – only having adequate income can.
The statistics tell the story. Half of the nation’s private-sector workers have neither a pension or savings to supplement Social Security and, as Leticia’s study for National Council on La Raza shows, the situation is even more acute among the Latino population. For those who do have 401(k)s, the median household account balance is $45,000 and around $98,000 for those closer to retirement. Again, because average income of Latinos tends to be lower, according to La Raza, so it stands to reason the account balances will also likely be less than the median. And, it goes without saying that defined benefit plans are falling by the wayside.
According to the Center on Retirement Research at Boston College all of these factors help contribute to the $6.6 trillion Retirement Income Deficit facing this country – which is the gap between what people have saved as of today and what they have already should have saved today to meet their basic retirement needs.
To address this Retirement Income Deficit, we need both incremental policy changes to the current system, as well as a comprehensive and dramatic vision for change for an improved pension system on top of Social Security.
But now back to technology.
I will focus on two issues today:
One: Should the critical information about 401(k) fees and other important plan information be automatically delivered to employees and retirees electronically and, if so, what is the impact?
Two: With 401(k)s as the dominant retirement savings vehicle, how does technology aid with investment advice?
The Pension Rights Center believes that receiving clear and accessible information about 401(k) fees and investment options is critical if people are to be able to protect and understand their 401(k) and pension benefits.
We recently wrote a letter to the Department of Labor with six other organizations – including the AFL-CIO, Service Employees International Union (SEIU), the National Council of La Raza, the National Women’s Law Center, and two consumer groups – that strongly supports the Department of Labor’s compromise rules, which we think strike the right balance between mail and electronic delivery.
The DOL rule says that employers and financial institutions can provide information electronically as long as an employee actually uses a computer in his or her everyday work. But where employees do not use a computer in their everyday work, the employee must affirmatively agree to receive information electronically. And this is the way it should be: the employee should decide whether they are more comfortable getting critical information about their plan and benefits in written form or on a computer screen.
We oppose the IRS rules, which allow plans and financial institutions to provide electronic disclosure to anyone they determine has effective ability to access a computer – and workers don’t have any say in making that decision. We believe that many workers will be harmed by this decision.
Both Pew Research Center statistics and the 2009 Current Population Survey show that the most vulnerable populations are the least likely to have computers at home or access to the Internet at work. While the Pew statistics show that the rate of internet use is growing among the Latino population (and that internet usage is a function of age, education and whether they are native born or foreign-born), there is nevertheless a lag overall between internet use by Latinos and other groups. The CPS survey reported that only 49 percent of Hispanics said they accessed the Internet from any location, while 74 percent of whites and 59 percent of blacks reported accessing the internet.
Here’s part of what is at stake in this debate: In just a few short months employers and financial institutions must provide disclosure statements about investment management and administrative fees that are charged in 401(k) plans. According to a GAO report, even a 1 percent annual charge for fees would reduce an account balance over 20 years at retirement by about 17 percent. And this would have a particularly adverse impact on lower account balances.
Fee disclosure is not the only important disclosure the law requires. The law also requires that plans provide employees with documents that lay out in clear language the key terms of their retirement plans and tells them how much they’ve already earned in benefits. Making sure that people are empowered to understand their plans – and protect themselves – is a key part of financial literacy. We find it very disconcerting that the very people calling for increased financial literacy – meaning teaching people about compound interest and asset allocation – are also the ones advocating for electronic disclosure as a blanket measure.
The financial services industry argues for electronic delivery as a cost-saving measure. Our concern is for the millions of workers who might miss out on key information about their fees and benefits, because they don’t have easy access to a computer, because they are not computer literate, or because they are simply wary about getting such confidential information online. We are talking about protecting factory workers, older Americans, people of color, and lower-income workers.
Here are questions I’d love the audience and panelists to contemplate in this debate: if someone has access to a computer or goes on the internet, does that mean they want to read pages and pages of confidential and complex financial information online? If someone has a computer, does that mean they, too, have a printer to print out all this info? And should we be concerned that, if all information goes electronic, that the potential for hacking grows exponentially?
There is a plethora of articles on how people need to be financially literate to manage their 401(k) money. And there are lots of websites that say they will help you increase your financial literacy and I respect all those efforts and think they are great for some people, especially those who are computer savvy and well-educated. But let’s be real. How many of us in this room do a good job of managing our accounts? It is unrealistic to assume that most workers are going to have the time, the knowledge or even the desire to manage their 401(k) plan assets. And the situation is worse for many lower-income workers or less educated workers, who often have to work two jobs and take care of their families. Even for someone with an interest, how do they know when a website or a book or a computer model provides good advice? And when they need professional help, how do they find a competent—and independent—investment adviser without conflicts of interests?
Technology is not going to be helpful to many of the people who need investment guidance. We think it generally far better to rely on skilled investment professionals to manage money in retirement plans rather than trying to use technological platforms to make every American worker a skilled investment professional. This simply is not possible. Technology is a tool, not a magic wand.
And let’s face it, if people have little money, there isn’t a whole lot that advice can do. That’s why the Center believes that we need to focus not just on improving 401(k) plans but also on developing plans that are adequate and secure for everyone. While automatic features can help improve 401(k) plans, we believe that no amount of tinkering will make these plans – that were meant to be supplemental plans – into true pension plans.
For that reason, we launched Retirement USA with labor, retiree, and consumer groups (Latinos for a Secure Retirement has signed on) to promote the need for a new pension system that is universal, secure, and adequate on top of SS. Retirement USA has developed 12 principles that we believe should underlie a new system. These include pooled and professional management, contributions by employers and employees and lifetime payments.
We believe that while improving 401(k) plans, we must also develop new risk-sharing models that combine the best of 401(k) plans and defined benefit plans. We encourage all of you to join in this dialogue.