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Retirement
ERISA at 50: past reflections, future possibilities
It is hard to overstate the impact that the Employee Retirement Income Security Act (ERISA) has had on the course of the U.S. retirement industry. ERISA was first introduced in 1974 by President Gerald R. Ford and signed into being on Labor Day of that same year. The Act represented a significant expansion of government power into what had largely been a private market area, reflecting a growing need for better regulatory structures to be put in place around disclosures and safeguarding assets within pension plans.
Much has changed within the landscape of American retirement during the past 50 years. This milestone anniversary represents a chance to look back as well as forward into what further steps may still be needed to protect lifetime income for all working Americans, beyond the replacement rates offered by Social Security.
Looking ahead, the retirement industry must keep expanding the number of people who are enrolled in workplace retirement plans. Currently, only about half of workers are participating in an employer-sponsored plan. Astonishingly, around 75% of the workers who aren’t participating aren’t doing so because their employers do not offer these types of plans.1
ERISA isn’t wholly responsible for the system currently available today. The 401(k) retirement savings plan wasn’t formally created until 1978 and wasn’t widely adopted by corporate retirement plans until the 1980s/1990s. The shift from defined benefit plans to defined contribution plans was motivated by companies’ desire to move the liability of defined benefit plans off their balance sheets. However, this transition came with a profound impact on the retirement security of millions of Americans, as their guaranteed income plans have largely disappeared. The emphasis has shifted ever-increasingly onto individual workers who must now be in charge of their own retirement savings, while not helping them generate the income needed to fund their retirements.
The next significant step in the legislative retirement landscape was the Pension Protection Act of 2006 (PPA), which is coincidentally celebrating its 18th birthday in 2024. This Act was designed to build on the foundation of ERISA, to further strengthen protections for workers and to allow for workers to save significantly more in their retirement accounts than was previously allowed. It also gave permission for automatic enrollment, a facet of retirement planning still firmly advocated for today.
One of the most significant provisions to come out of the PPA was the Qualified Default Investment Alternative (QDIA). QDIA is a default investment option that employers can offer in their employee retirement plans. These default investments essentially gave rise to the modern 401(k) investment landscape and the diversified “life-cycle” fund (greater equity exposure for younger participants, more fixed income for older participants), i.e., the now ubiquitous target date fund.
The growth of target date funds has been rapid, largely thanks to the safe harbor language in the PPA that protects employers in the event of a market downturn. Prior to the PPA, default investments were usually money market funds, or other vehicles that were less likely to lose value during adverse market conditions. By helping capital appreciation to become part of the recognized goal of a retirement account, alongside the greatly raised limits on contributions, the PPA allowed for workers to properly build a nest egg. The growth of target dates is now well known, and they continue to hold a significant position among in-plan retirement assets.
The shift of U.S. retirement is toward personalization, more decisions being made by individuals and more crossover between the traditional areas of retirement and wealth financial planning.
What’s next?
The U.S. retirement industry is never really standing still, despite the relatively stable regulatory environment. We don’t see any major retirement legislation currently on the horizon, especially as SECURE Act I and II provisions are being worked through, and the Tax Cuts and Jobs Act is set to expire at the end of 2025.
That said, new products are always in development. One area currently driving development within the retirement planning landscape is the growth of advisor managed accounts. These accounts allow for significantly more customized options than those offered by target date funds. Beyond age and target retirement year, these managed accounts incorporate factors including non-retirement account assets, detailed information about participants’ salaries, contribution rates and histories, and overall risk tolerances.
By 2021, advisor managed account assets had grown to more than $400B from approximately $150B in 2014. While most plan sponsors now offer managed accounts within their plans, there is still work to be done to establish the value proposition.2 The higher costs associated with managed accounts naturally act as a barrier to entry and make for a more difficult conversation with participants, so plan sponsors need to carefully consider the additional value that participants will receive from the more personalized service.
The fact remains though that the U.S. retirement system is largely predicated on individuals making their own decisions regarding how much to save and where to direct their dollars. And, while the majority of these individuals default to their employer-sponsored retirement plans, those who would prefer more customized advice or whose situations are more complex and could benefit from more directed financial planning could be well served by a managed account offering such as advisor managed accounts or an SMA.3 The shift of U.S. retirement is toward personalization, more decisions being made by individuals and more crossover between the traditional areas of retirement and wealth financial planning. Managed accounts may represent the next step in the retirement planning evolution.
The future is lifetime income
Conversely, there is one area in the retirement landscape that is reversing back toward the pre-ERISA era, a time when most workers had defined benefit pensions and knew exactly what income payouts they would receive in retirement. This area of growth is the in-plan guaranteed lifetime income solution, a retirement option that is designed to replicate the worker’s paycheck during retirement.
This growth area was cemented by the SECURE Act of 2019 through the safe harbor provisions for lifetime income solutions that are a part of retirement plans. The Act, which amends ERISA Section 404, lays out the process that plan sponsors have to engage, in order to include guaranteed income contracts within their retirement plans. As the Act pertains to the selection of an insurance company to provide the guaranteed retirement income contract, those with fiduciary responsibilities will be deemed to have satisfied their fiduciary obligations if they:
- Engage in an objective, thorough and analytical search for the purpose of identifying insurers from which to purchase such contracts,
- Consider the financial capability of each insurer to satisfy its obligations under the guaranteed retirement income contract, and
- Consider the cost (including fees and commissions) of the guaranteed retirement income contract offered by the insurer in relation to the benefits and product features of the contract and administrative services to be provided under such contract.4
These provisions allow for the inclusion of annuity contracts within the retirement plan, and for the integration of lifetime income. This will help retirees think about their spending plans and convert their savings balances into a stream of income that can last them throughout their retirement. And while much of the legislative work has been done to allow for guaranteed lifetime income products to be embedded within retirement plans, we still see a lot of work to be done to work with plan sponsors, their advisors and consultants, and individual plan participants. Work also remains on education around the value that lifetime income can provide, what these products fundamentally are and how they can work within a plan, and how the area of lifetime income is going to continue to evolve as more record keepers integrate these products and more plan sponsors take them up.
It has been a fascinating few decades for retirement industry legislation, from ERISA through the PPA and now with the implementation of the SECURE Acts. We believe the growth of managed accounts will continue to have an outsized impact on how retirement assets are managed, and the integration of guaranteed lifetime income is poised to make retirement more accessible and manageable for millions of American workers.
In this issue
The American retirement system has long been focused on one principal aspect: getting workers to save early so they will have enough money to live on during retirement.
The U.S. retirement system faces significant challenges in ensuring adequate retirement savings for its participants.
The complex relationship between financial and mental health has profound implications for workplace productivity, employee engagement, and overall wellbeing.
Endnotes
1 Center for retirement research at Boston College. 2022.
2 Cerullli. 2021.
3 NAPA.net Are 401(k) Managed Accounts a Misunderstood Value Proposition?. 2024.
4 TIAA. 2021.
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.
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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.
Nuveen, LLC provides investment advisory solutions through its investment specialists.
The 2024 Annuity Payout Advantage is hypothetical and for illustrative purposes only. The Annuity Payout Advantage calculations use the TIAA Traditional “new money” income rate for a single life annuity (SLA) with a 10-year guarantee period at age 67 using TIAA’s standard payment method beginning income on March 1, 2024. Individual results may vary. Example: Participants A and B both had a retirement savings balance of $1 million as of March 1, 2024. Participant A withdrew 4% ($40,000) in year 1. Participant B made a one-time transfer to TIAA Traditional and selected an SLA with a guarantee period of 10 years at age 67, starting on March 1, 2024. Participant B received an income rate of 7.8% ($26,000) on $333,333 annuitized in year 1; Participant B also withdrew 4% ($26,667) from the $666,667 remaining saving balance in year 1. The result ($52,667) is initial income for Participant B in year 1 that is 32% higher than the initial income of Participant A ($40,000). Income rates for TIAA Traditional annuitizations are subject to change monthly. TIAA Traditional Annuity income benefits include guaranteed amounts plus additional amounts as may be declared on a year-by-year basis by the TIAA Board of Trustees. The additional amounts, when declared, remain in effect through the “declaration year”, which begins each January 1 for payout annuities. Additional amounts are not guaranteed beyond the period for which they are declared. TIAA has paid more in lifetime income than its guaranteed minimum amount every year since 1949. Over the past 30 years, TIAA has given 19 income increases to existing annuitants (as of January 2024). Past performance is not a guarantee of future results. An annuity is a product issued by an insurance company. It is an agreement that comes with a contract outlining certain guarantees. Fixed annuities guarantee a minimum rate of interest while you save and, if you choose lifetime income, a minimum monthly amount in retirement. Converting some or all of your savings to income benefits (referred to as “annuitization”) is a permanent decision. Once income benefit payments have begun, you are unable to change to another option.
TIAA Traditional is issued by Teachers Insurance and Annuity Association of America (TIAA), New York, NY. This point of view is designed to be a starting point for the retirement income conversation. It is not a recommendation. Annuity contracts may contain terms for keeping them in force. TIAA can provide you with costs and complete details. TIAA Traditional is a fixed annuity product issued through these contracts: Form series including but not limited to: 1000.24; G-1000.4; IGRS-01- 84-ACC; IGRSP-01-84-ACC; 6008.8. Not all contracts are available in all states or currently issued. Paycheck is the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA’s fixed annuities. Any guarantees under annuities issued by TIAA are subject to TIAA’s claims-paying ability. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes. TIAA may provide a Loyalty Bonus that is only available when electing lifetime income. The amount of the bonus is discretionary and determined annually. Your Loyalty Bonus percentage is the additional amount of lifetime income you would receive at the time of annuitization compared to a new contributor who annuitizes an equal amount at the same time. Converting some or all of your savings to income benefits (referred to as “annuitization”) is a permanent decision. Once income benefit payments have begun, you are unable to change to another option. This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision. Annuities are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Performance data shown represents past performance and does not predict or guarantee future results. TIAA Institute is a division of Teachers Insurance and Annuity Association of America (TIAA), New York, NY.
