California’s plan to automatically enroll private-sector workers who don’t have retirement plans into a state-run savings account, the Secure Choice plan, was signed by Gov. Jerry Brown last year. It’s a state-mandated (but not state-funded) program that requires private-sector employers who do not offer employer-sponsored retirement plans to automatically enroll their employees into individual retirement plans. And there appears to be an emerging consensus around the optimal Secure Choice plan design – an individually controlled, 401(k)-style defined-contribution retirement plan structure that could mark the dawn of a new day for responsible retirement planning.
Yvonne Walker, president of Service Employees International Union Local 1000, the largest public-sector union in California, and chair of the SEIU Retirement Security Committee, said, “Our members helped bring Secure Choice from concept to reality, following through on our commitment to ensure every Californian has access to a dignified retirement.”
Similarly, the California Teachers Association supported Secure Choice, noting, “All Californians deserve to have a secure, adequate pension, which should be provided by an employer. … If an employer does not offer pension benefits, an employee should be given an option to invest their own funds into a secure retirement plan that is not controlled by Wall Street.”
The acknowledgment from key unions representing government workers that these defined-contribution retirement plans are an appropriate means to retirement success for millions of Americans is a big step forward since labor unions have historically supported employer-guaranteed, defined-benefit pension plans.
This is not to suggest that labor unions representing public-sector employees have changed their focus of supporting traditional defined-benefit pension plans, which guarantee lifetime benefits for their members. That support certainly continues, largely unchanged. But their acknowledgment of the reality that different retirement plan designs can effectively achieve income replacement objectives and set people up for retirement is important. The objective – a secure future and standard of living during retirement years – not the design of the retirement plan, should be, and increasingly is, the focus.
This new focus on retirement plan outcomes – as opposed to the divisive “design first” rhetoric that has permeated pension discussions in the past – is as welcome as it is necessary. The growing consensus around defining a retirement plan’s objectives first and then letting those goals drive the plan’s design is in the best interest of workers, employers and state taxpayers alike. Today’s workforce differs substantially from that of a generation or more ago. Factors like employment patterns, life expectancy, and generational realities must be considered in retirement planning.
Even setting aside the unfunded liabilities that plague many public-sector pension plans, perhaps the most prudent way to achieve retirement income security for the broadest cross-section of modern workers going forward will be through defined-contribution retirement plans that are focused on long-term retirement income, while also recognizing employee mobility and managing investment risks. With properly articulated objectives and sound plan design, these plans can meet workplace needs while providing full budgetary predictability – and not creating unfunded liabilities.
As workers seek out better job opportunities or relocate in pursuit of quality-of-life improvements, retirement plan portability is growing in importance. The days of working at the same job for several decades have largely passed. In today’s job market and economy, workers need to be able to take their retirement plans with them as they move from job to job. According to the U.S. Department of Labor in 2016, the median tenure in state government employment – often thought of as more stable than the private sector – was just 5.8 years.
“Objectives-first” retirement planning is critical for long-term success. As various influential groups increasingly adopt this philosophy and move away from entrenched design-first thinking, plan participants will benefit. There will be new retirement plan designs that better meet the needs of the modern workforce while satisfying the economic realities for employers and all involved.
This column originally appeared in the Orange County Register.