“Retirement has become a source of great anxiety in our nation.”
That is how a man whose name has been bandied about lately as a long shot to become the next chairman of the U.S. Federal Reserve describes the state of retirement in America. TIAA-CREF President and CEO Roger W. Ferguson says three things characterize the current retirement landscape in the United States:
- An aging population
- A lack of confidence around financial security
- An inadequate level of financial literacy
During his address at the IRI Vision Annual Meeting in Chicago, Ferguson stressed how urgent it is that consumers, financial advisors and policymakers take steps to mitigate and overcome those challenges. “The longer we delay making needed changes, the greater the negative impact will be,” Ferguson said. “Future workers will have to pay larger tax increases, and future retirees will have to accept larger benefit reductions.”
The financial crisis and economic downturn has forced many investors to re-evaluate their approach to retirement savings. Ferguson noted workers have shifted away from company stock to products like annuities and target-date funds.
“In annuities, we have a product that’s not just an investment vehicle – but a real retirement vehicle that can help fill the gap created by the demise of defined benefit plans in the private sector and the shortfalls of the 401(k) model,” Ferguson said.
But changes in products and strategies are not enough. Speaking to an audience of retirement industry professionals, Ferguson challenged them to do a better job of figuring out how to connect with various investors. Advisors know one-size-does-not-fit-all, but they continue to look for answers in how to tailor their business to appeal to groups like women and minorities. In particular, Ferguson said advisors need to craft their messages for Gen Y investors, many of whom sometimes struggle to comprehend the importance of saving for later stages in life.
One of the reasons Ferguson tasked financial professionals with improving their outreach methodology is because he is dismayed at the state on financial literacy in the U.S. Ferguson lamented the fact that roughly half the states in the U.S. do not require any kind of financial literacy sufficiency prior to high school graduation. While this leaves many students in those states behind the curve, Ferguson said the solution sometimes varies. In some cases teachers themselves do not possess a high level of financial literacy. Other teachers are financially astute, but they lack the tools and curriculum needed to pass that financial literacy on to their students.
“People with a high degree of financial literacy are more likely to plan for retirement,” Ferguson said. “Planning for retirement is a powerful predictor of wealth accumulation. People who plan for retirement have more than double the wealth of people who do not plan.”
On the public policy front, Ferguson said Medicare, Medicaid and Social Security must undergo major structural changes so workers can feel confident that those programs will remain viable until they become beneficiaries.
Ferguson concedes many large countries haven’t solved the retirement saving puzzle, but he believes the U.S. can learn a few things from countries like Australia that “mandate” saving. Ferguson believes some kind compromise solution would be best, with combined contributions between the employer and the employee totaling around 10% of salary.
Ferguson added that the retirement industry could play a role in helping not just individual investors, but also those responsible for public sector plans. “We have the know-how to innovate and develop new products that meet the needs of this new age, not only for individuals but for the public sector, which is struggling under the weight of unfunded liabilities for its pension systems.”
TIAA-CREF manages the hybrid risk-managed defined contribution plan recently adopted in Rhode Island. Ferguson said outreach about the program prior to its adoption involved hundreds of TIAA-CREF employees hosting town hall-style events to field questions and assuage concerns. And not all those educational sessions were aimed at everyday Rhode Island citizens. Ferguson said many meeting were held with bureaucrats and politicians to help them understand the details of the program under consideration.
Ferguson says implementation in Rhode Island has also been a “hands-on” endeavor. TIAA-CREF maintains offices in The Ocean State to clarify and uncertainties that remain about the program.
“The industry can help people achieve retirement readiness in their working years – and then provide them with lifetime guaranteed income throughout all of their retirement. That’s an outcome that matters.”