ERISA Turns 50 - Addressing the Retirement Income Gap

Here’s a quick take on a significant retirement policy challenge and a proposed solution.

First a baseline factual overview:?

ERISA, the Employee Retirement Income Security Act of 1974, is approaching its 50th anniversary. Despite the prominence of “retirement income security” in ERISA’s title, American workers’ retirement income security has declined significantly during the last five decades.

In 1975, more than 70 percent of retirement plan participants had a defined benefit plan – and the accompanying stream of guaranteed lifetime income in retirement. By 2020, only 12% of retirement plan participants had a defined benefit plan. (Source: Employee Benefits Security Administration, U.S. Department of Labor, October, 2022)?

Because the majority of defined contribution plans, like 401(k) plans, don’t provide an easy way to implement a guaranteed, or any, stream of income throughout retirement, many retirees are at significant risk of running out of retirement savings as they age and having to rely on Social Security, which faces its own challenges, or other sources of income to meet their needs.

To help address this “retirement income gap,” policymakers – Congress, the Department of Labor, Treasury – should make it much easier for retirement plan sponsors and participants to offer and implement lifetime income solutions. As retirement savers hit age 50, plan sponsors should begin educating them about different retirement income options and provide an accompanying set of affordable and easy-to-implement in-plan options to help retiring workers obtain lifetime income.?

Much like there are Qualified Default Investment Alternatives (QDIAs) that Congress and the Department of Labor created and that plan sponsors have effectively used to help workers during the savings phase of their careers, we need to implement something like Qualified Payout Options (Retirement Q-PON) so that workers can easily choose from an appropriate range of payout options to meet their needs and interests. Some ideas include partial annuitization, managed payout options, systematic withdrawal, and lump-sum distributions for those who want to take advantage of professional investment advice or manage their own money in retirement. What else should be on the menu???