Saving retirement, without the fiduciary riskNews added by Benefits Pro on August 28, 2014
By Nick Thornton
Imagine a world where employers provide retirement security for their employees through a uniform, standardized defined contribution platform, and in the process, assume absolutely no fiduciary risk. None whatsoever.
Sound like fantasy? Not to Russell “Rusty” Olson.
For more than two decades of his career — which has spanned well over the past half-century — Olson was the global director for pension investments for Eastman Kodak. He’s been running his own consultancy since leaving Kodak in 2000, advising charities, and working as the Investor In Residence for the University of Rochester Endowment Fund.
That’s where he met Doug Phillips, who’s the chief investment officer for the University of Rochester’s $2 billion endowment.
Together, the two have authored a proposal that Olson thinks is the “first really comprehensive solution” to what he believes is the country’s systemically inadequate retirement system.
Comprehensive it is. The plan addresses many of the regulatory and theoretical issues currently challenging defined contribution plans.
Also read: Hope to hide from fiduciary risk? Fuggedaboutit
It claims it reduces inflated fees, sets a clear fiduciary standard across the board, whittles down the “14 or so” types of DC plans to one, sets default options for employers, and maybe most importantly, it gives all employees throughout the country access to a defined contribution retirement plan.
The linchpin to the cure for what ails the current DC system is what Olson and Phillips are calling Trusteed Retirement Funds. Olson says these TRFs would be more broadly diversified funds than the options now available to participants.
Each TRF would be sponsored by a trustee, who would assume all fiduciary liability — taking that thorny proposition off employers’ desks.
“This addresses the issue of all those employers who don’t offer plans because they don’t want to assume liability risk,” explained Olson.
He says the trustees of TRFs would be existing fund and investment management companies. They would be eager participants to the proposed system, says Olson, because they already assume fiduciary risk, and they would be able to earn new revenue from management and administration fees.
That said, Olson underscores that they would not be able earn commissions on the sales of specific investments within a TRF.
“We have to address the costs of current defined contribution plans,” said Olson. “They are too expensive for employers, too expensive for employees, and they are too complex. People will earn money to do the job of growing assets. They won’t make money off of marketing gimmicks. That would be a boon for both employees and employers.”
But not necessarily a boon to all interested parties in the existing retirement industry.
Part of the plan includes the government setting up a new agency to oversee TRFs, which Olson says could be naturally folded into the Department of Labor.
The work of reporting plan performance to each participant in the country would fall to the agency. That may not eliminate third-party administrators altogether – Olson says the government could contract with existing TPAs – but it’s conceivable that such a move would cut overall payments to TPAs, in the way the federal government currently limits Medicare and Medicaid reimbursements.
There is also that question of reduced revenues to fund companies. TRFs would prohibit profiting on the sales of specific products. Fund managers hired by the TRF would have to be compensated from the TRF’s management fee. They too would be fiduciaries.
Those questions aside, under the TRF model, annuities would be more universally available to retirees upon leaving the workforce.
Olson is a fan of annuities. “They are a right and proper way for a retiree to have their income distributed,” he explains.
As is, not nearly enough people utilize them, he explained. That makes them expensive. And longevity issues also drive up costs. By establishing a federal re-insurer to annuity companies (Olson calls it the Federal Longevity Insurance Program), insurance companies could be incentivized to create more products that guarantee income throughout retirement.
Olson’ and Phillips’ retirement reform proposal is the latest to have cropped up at the state and federal level in the past several years.
Olson is familiar with them all: Iowa Sen. Tom Harkin’s Retirement Funds Act, President Obama’s myRA plan and several others.
Harkin’s plan touts universal access, automatic enrollment, defined monthly benefits, portability for workers and simplicity for employers.
“It doesn’t go nearly far enough,” says Olson, noting that the Harkin approach cobbles together a mix of concepts and desired outcomes and puts them together without addressing the administrative realities necessary to achieve those desired incomes.
And the president’s myRA plans are not nearly diversified enough — they tout safety by investing only in U.S. Treasuries. Olson says TRFs utilize the full range of diversification.
Whether the TRF idea catches fire remains to be seen. Olson says his and Phillips’ ideas are not meant to be “an academic exercise.”
“We think we’ve created something that is implementable, and attractive to all parties,” he says.
“This problem needs to be addressed now. In a serious, realistic and comprehensive manner.”
Now if only they can get the people on Capitol Hill to listen.
Also read: The push to save Social Security
Originally published on BenefitsPro.com
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