The Honorable Seth Harris, former Deputy Secretary and Acting Secretary of Labor in the Obama Administration, discusses the challenges and options for addressing retirement coverage and adequacy, including the importance of state-facilitated retirement savings programs and provisions of the SECURE Act, such as pooled employer plans and lifetime income. He also shares his thoughts about how retirement policy and priorities might be different if there are changes in Congress and the Administration after the November 2020 national election.
ANGELA ANTONELLI: Welcome to “The State of Retirement,” a conversation with industry leaders, policymakers, and academic experts shaping the future of retirement. “The State of Retirement” series is produced by the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy in Washington, D.C. Through its research, education, and communications initiatives, the Center supports and encourages innovative solutions to strengthen the financial well-being of individuals and families up to and through retirement. You can learn more about the center at cri.georgetown.edu.
ANGELA ANTONELLI: Welcome to the latest episode of “The State of Retirement.” I am Angela Antonelli, Executive Director of the Georgetown University Center for Retirement Initiatives. In this episode of “The State of Retirement,” I am thrilled to have the Honorable Seth Harris as our guest. He is an attorney in Washington, D.C., and a visiting professor at Cornell University’s Institute for Public Affairs, building on almost seven years of service in the Clinton Administration. He was Acting U.S. Secretary of Labor, and a member of President Obama’s Cabinet and Deputy U.S. Secretary of Labor from 2009 to 2014.
Now, Secretary Harris is one of the nation’s most-sought-after analysts and commentators on work, workers, workplace, labor market, and retirement issues; government leadership; and government performance. During the recent COVID-19 pandemic, Secretary Harris has made dozens of television and radio appearances and participated in webinars for numerous organizations, including one recently for the Georgetown Center, which you can find the replay of on our website, to help Americans better understand the pandemic’s effects on the economy, workers, small businesses, and unemployment, as well as the government’s response to the health and economic crisis.
Secretary Harris brings decades of experience as a teacher and scholar, attorney and advisor, corporate board member, and leader at the highest levels of the U.S. government. He teaches leadership and public affairs for Cornell graduate and undergraduate students. He has coauthored three books, including on labor and employment law and economics, and authored dozens of scholarly articles and op-eds on labor employment, leadership, government performance, retirement, and economic topics.
On today’s podcast, Secretary Harris will discuss with me the challenges and options for addressing retirement coverage and adequacy, including the importance of state-facilitated retirement savings programs and provisions of the SECURE Act, such as pooled employer plans and lifetime income. He also shares his thoughts about how retirement policy and priorities might be different if there are changes in Congress and an administration after the November 2020 national election.
Let us meet Secretary Seth Harris.
Seth, thank you so much for joining us today.
SETH HARRIS: Oh, it is a pleasure. Thanks for having me.
ANGELA ANTONELLI: Please tell our listeners a little bit about yourself, your career path, and the focus of your work today.
SETH HARRIS: Well, today, I am a lawyer and a teacher. I teach for Cornell University’s Institute for Public Affairs as an advisor, and I like to think of myself as a freelance policy expert. I’m not sure that’s the formal title, but I give out policy advice to anybody who will listen. And I occasionally write scholarly papers and popular work to try and put out some policy ideas. This is my post-government life. I was in government for a total of 12 years, over two administrations. I spent five years in the Obama Administration as the Deputy U.S. Secretary of Labor and six months as the Acting Secretary of Labor, and then I spent six and a half years in the Clinton Administration, also in the Labor Department, as a policy advisor to both Secretary of Labor Bob Reich and Secretary Alexis Herman. I had a lot of different titles, but the job was essentially the same, and that was to offer policy advice and to do policy work for them.
In between, I was a law professor for almost a decade. I taught labor and employment law torts, which is the most fun class in law school — most people will tell you because of the crazy fact patterns. Prior to joining the Clinton Administration, I was a law clerk for two federal judges, one in Portland, Maine, at the District Court and another for the U.S. Court of Appeals for the Ninth Circuit. That’s when I thought I was going to be a really serious lawyer, rather than a policy lawyer. Prior to law school, I worked in the labor movement.
My career began in the labor movement. I spent five years helping to represent merchant mariners — guys who sail ships across the ocean, and tugboats and barges on the lakes and rivers. And I did political and legislative work. I helped the members deal with big bureaucracies like the union pension plan and government and Social Security and other things, and helped with the management of the union locally. That was a great way to start out. My undergraduate degree is in labor relations, so I’ve been doing something having to do with labor and employment law, on and off, for most of my life. And it’s been a fantastic career. I have been very, very fortunate that a number of people who rose to power trusted me enough to have me help them.
ANGELA ANTONELLI: I think we’ve both enjoyed our policy careers in Washington, although we have served in different administrations, but as I often say, I do believe that there are a lot of areas where we have more in common than differences.
SETH HARRIS: I agree with that. Let me say that retirement policy has long been one of those areas that has been widely bipartisan. There is an alignment of interests in large respect, although not entirely. There are some disagreements — the fight over the fiduciary rule during the Obama Administration was a big schism among the groups that often work together on retirement policy. But, as you know, we just passed the first case of major retirement legislation since 2006, and that was the product of a left–right coalition of folks who were interested in retirement and want to help people be as successful as possible with their retirement savings and their retirement income, and that was why it was able to succeed. It only took six years! That bill came to fruition because there was a lot of education involved, but on both sides, we were actively engaged in it. I think it’s intriguing that retirement policy is such a bipartisan topic; not perfectly so, but there’s a lot of agreement, so I think it’s not surprising that you and I have come together around that issue.
ANGELA ANTONELLI: Absolutely, and it’s been a joy for me to be here at Georgetown now at this phase of my career, helping to build the Center for Retirement Initiatives and contribute to a lot of work that you and so many others have been doing in the retirement space for some time. For example, in the case of the state-facilitated retirement savings programs, helping to educate and inform and to build bipartisan support for these innovative retirement savings programs. As you know, the access gap is large. I think there is a lot of room for both the private sector and for the government, and right now being led by states, to play a role in filling that.
SETH HARRIS: Yes, I think that is exactly right. And let me just say the work that your Center does in support of these state plans is really admirable, and I think has played a critical role in their continuing success. They are young; they are not embryonic anymore, but I think there are really important signs that they are moving in the right direction. And the big question, and I’m hoping that you’re going to continue to lead the way on this, is whether we can expand those state retirement plans to more states, because it’s a very, very important way for folks who don’t really have access to other vehicles for saving to have a safe, reliable place to accumulate money.
There is this phrase that you and I use, but real human beings don’t use, for how people are going to “decumulate” their money, meaning how are they going to receive their savings after they have accumulated, hopefully, a sufficient amount of money. The state retirement plans are serving a vitally important need. As they mature, there will be enough money in there to really, I think, make a meaningful difference in people’s lives, so you are deserving of a lot of praise at this time. Let me say, you started with the state retirement plan planning and support when we didn’t really know whether or not they were going to make it, right? That is, we did not know whether there would be these state retirement plans; whether or not those that were created would survive and find a way to function. In large part because of your work, not just in advocacy and helping them to think through the very complex problems that they encounter, I think that they’re doing extraordinarily well. And let me say, I have talked to some of the leaders of these plans, as you have, and they are full of praise for you and for the Georgetown CRI. I am not trying to give you a valedictory so that you will now retire from your work. It sounds like that — it sounds like I am speaking at your retirement party, and I am not. Please stick around, because there are a lot more states that have to adopt these plans.
ANGELA ANTONELLI: I appreciate the kind words, Seth, and it makes all the hard work worthwhile because you do it to try and make a difference in the world. You know, the Center is a hub to bring states together. And as you know, government — one of its responsibilities is, in fact, to highlight where a problem exists, or markets fail. As I think about the retirement access gap — the lack of retirement savings — the states have really helped to amplify and address this problem, and one of the ways beyond what the states are actually doing is also to challenge the private sector to step up and to be more innovative and to seize the opportunity to solve a problem. I think that is starting to happen. I think it is great to see how the private sector has come to understand where they have dropped the ball and where they can do more to help contribute to strengthening retirement security. In the end, what I think we’re seeing now is a much more productive and constructive dynamic going on.
SETH HARRIS: I agree with that completely, and I have made that case privately to people in the retirement savings industry — that they should view these state retirement plans as an opportunity, because the people who are being served in those state retirement plans are workers who really don’t have access to private sector products. But if they can be encouraged and facilitated in saving money, there will be pools of money created that the private sector can help consumers to figure out how they’re going to — again, here’s the word — decumulate; how they’re going to turn pots of savings into reliable lifetime income — you know: retirement income. That’s a critical role that the private sector can play in working with these state retirement plans and the state retirement plans are, to some extent, making a market; they are educating private sector workers about the critical role that retirement savings can play in their financial planning.
A lot of these are folks who don’t think about financial planning because they don’t have any finances — perhaps have so little money that they’re really living paycheck to paycheck and often live on debt in between paychecks, and they’re working multiple jobs, and they’re not earning very much, so retirement savings have long been just an afterthought if they thought about it at all, simply because they’re worried about the economics of the moment, not the economics of 20 or 30 years down the line. What the state retirement plans have done is they have helped to educate workers in the states that have them, about thinking about retirement savings. Even a very small amount of money can accumulate into enough to make a meaningful difference to supplement Social Security. And that really is what retirement income should be doing, is supplementing the amounts that people will be getting from the Social Security Administration. More than 90 percent of American workers get Social Security benefits, but Social Security on average only covers about 40 percent of your pre-retirement income. It only replaces about 40 percent of pre-retirement income for low-wage workers, but it certainly does not approach 100 percent, and they need some kind of a supplement. Even if it is a small supplement, that will give them a greater income and allow them to get what they need in retirement.
ANGELA ANTONELLI: We will come back to the issue of lifetime income, but let’s spend a little time discussing the current situation we find ourselves in today — the COVID pandemic and its corresponding economic impacts. We are seeing just how financially fragile people are here in the United States, and around the world. Here in the U.S., millions, literally, by missing one paycheck are not able to pay their bills. What surprises you most about the time we find ourselves in — what we’re seeing with respect to individuals, families, and businesses, and their financial conditions and the ability to weather even a short-term — what we hope will be short-term — economic shock?
SETH HARRIS: Well, I am tempted to say that everything has been a surprise and almost all of it has been an unpleasant surprise. Even though I am a pretty old guy, I’ve never seen anything like this in my life. I do not think any of us have. The last pandemic was 100 years ago, and certainly our economy was structured differently. We did not have so much international travel. We did not even have as much intra-national travel within the United States, and so the spread was not as rapid and so I think all of it has been a shock and a surprise. The government at first voluntarily shut down large segments of our economy, which, of course, caused a lot of people to lose their jobs. It caused a lot of people to lose income. It would cause a lot of people who were fortunate, like you and me, to end up working from home, so the businesses with whom we did business when we were in our offices now are without our commerce.
But over time, as it became apparent that the pandemic was not going to be easily constrained, was not going to be easily addressed, was not going to magically disappear, but was going to spread and spread seemingly without easy protection, fear became one of the most-important economic forces in our country. People are afraid of interacting with one another. They are afraid of being out in public. They are certainly afraid to go to a restaurant or a store or a mall. They are petrified by what is happening in economic markets, in equity markets. There was more volatility in equity markets during this pandemic than we have ever seen in the time that volatility has had a measure, even greater than the great recession of 10 years ago; more than 10 years ago; more than the dot.com bubble burst.
I mean, stocks were swinging wildly until the Federal Reserve dramatically intervened with a flood of money into equity and debt markets. There was real panic that people were going to lose their life savings, particularly people who were planning to retire this year or last year, next year — that they were going to be hit by what we call sequence of returns risk, which means the value of their investments was going to go down right when they were going to try and translate those investments into a stream of income for their retirement. There was really a deep fear around that.
Now the markets have settled down some, although they’re still at a very historic — historically — high level of volatility, but also even worse than what happened in the markets is very large numbers of people lost their jobs or lost a lot of income, which meant that even though they were living paycheck to paycheck, not only did they lose their paychecks and have to wait to get an unemployment check, which largely, but not entirely, replaced what they were earning, but they ended up having to dip into savings and, in some cases, they had to dip into their retirement savings to pay today’s bills. And let me just say that was families — there was a large percentage of families, but it was also a large percentage of small businesses.
Small businesses often live just like families: paycheck to paycheck. They are paying last month’s bills with this month’s revenue. Maybe they have a small cushion, but not very much, you know, because they have to buy supplies. They have got to buy whatever the raw material for whatever it is they make; the food, if it is a restaurant, for example. And so they were left with no revenue and maybe they could get a loan from the federal government — a PPP loan, a Paycheck Protection Program loan — but maybe they didn’t; maybe they could get a loan in the debt markets. They could borrow money from a commercial lender, but a lot of people were put at risk.
And now what we are seeing is an accelerating rate of bankruptcy, particularly, sadly, in the African American community. A lot of African American small businesses are simply disappearing, but also in the majority community, we’re seeing businesses disappear as well, even large companies, particularly in retail, which was already teetering a little bit — we’re seeing a lot of bankruptcies there, retrenchment, shrinking of businesses. What that means is that a very sizable percentage of people are going to be permanently unemployed; not meaning for the rest of their lives, but they don’t have a job to go back to is what we mean by that. And that is going to lengthen the recovery. It’s going to mean a lot of pain for a lot of families for a lot of time; and as long as the pandemic is around, and it looks like it’s going to be around for a while, this fear factor.
This fear indicator is so important to our economy and it is going to continue until we get a grip on how we can reopen safely and not see the kind of extraordinarily dangerous spikes in infection rates and hospitalization rates that we’re seeing in a large number of states across the country, and quarantine orders in other states. Our economy is really going to struggle — family revenue is not going to return, small business revenue is not going to return, large business revenue is not going to return. We’re going to be at risk, so to talk about retirement savings, to say to people, “Well, yes, you’re in crisis, now let’s think about what’s going to happen in 10 years, 20 years, 30 years,” depending upon their age, it just doesn’t compute.
People cannot imagine thinking that way. They may need their money for now and my guess is — I don’t know this, but I suspect — that rates of retirement saving have gone down substantially in our country, and people are unsure about what to do. If they have a little bit of extra money, they are unsure about what to do with it. Markets are bouncing around; they are worried they might lose their jobs, so they want to keep it in savings. This is a deeply unsettling time, and that’s not what families or businesses want. They want to be able to plan. They want to be able to look ahead. They want to be able to prepare. And in these times, it’s very, very hard to do that.
ANGELA ANTONELLI: Clearly, the longer this goes on, the greater the damage to the economy and to the financial well-being of families, including putting more retirement savings at risk. So far, I’m not hearing from plan providers or record-keepers and others that there’s been a huge amount of withdrawals, for example, in these first few months, but it depends on how long this goes on, and it raises questions that we’ll have to ask and answer, such as how much bigger did the hole get. If businesses have been lost and they provided retirement savings plans, then they will not be doing that anymore. If workers are losing their jobs, then they are not saving anymore. And you know, one thing that makes us different relative to other countries is the first thing that we do in an economic crisis is say to folks who, if they have retirement savings, it’s okay to go raid your retirement savings account.
And the stimulus packages that have been enacted so far — the CARES Act, for example, allows and in my view, encourages — people to raid their retirement accounts, and other countries just don’t allow that to happen. They do not make it easy to raid the accounts. Unfortunately, I think they might be looking to the U.S. and considering the economic pressures, allowing people to start to access their retirement accounts, which I think is a mistake. In countries like the United Kingdom — the UK NEST program does not really allow folks to go in and tap and use their retirement funds as rainy-day funds. They have been experimenting with creating emergency savings accounts and experimenting with that today. Retirement savings, unfortunately, in the U.S. are often the only savings people have. And then again, we let them raid those retirement savings if they need to get through a tough period.
As we emerge from this crisis, I am hoping that there might be a greater momentum and understanding of the importance of savings more broadly, and retirement savings would be a part of that. I’d like to think there’s reason for optimism, because I’ve heard people say to me, “Okay, I’m starting to get it. I understand the importance of savings. I understand, therefore, the importance of the state retirement savings programs to help people save.”
So, Seth, as we look to the future, is there a reason to be optimistic? Are you hopeful that maybe we will have learned some lessons so we understand that we need to make it easier to save and we need to make it harder to spend, or certainly to go into debt? Do you think there will be renewed momentum coming out of this crisis for additional reforms that will help to encourage savings, including retirement savings?
SETH HARRIS: I am skeptically optimistic that we are heading to a time when we will have more ways for people to save for retirement. The significant shrinkage of pension access has been really a devastating blow to the American middle class. I did a back-of-the-envelope calculation on what I call the pension gap, which compares the percentage of workers who had pensions when the Employer Retirement Income Security Act (ERISA) was passed in 1975 with the percentage who had them in 2016. And if we had sustained the percentage of people who had private sector pensions in 1975 into 2016, 37 million more people would have had pensions than had them in 2016. And you know, that is not everybody; that’s about somewhere between 20 percent and 25 percent of the American workforce, but those are the folks who could have expected to have pensions. Not everybody, even at the height of it. We only had about a third of private sector workers in pensions. Contrast that with state and local government, where you have north of 85 percent in pensions, and the federal system, where almost 100 percent of the workers are in some kind of a pension system, although it’s a mix — it’s a hybrid pension and defined contribution system, but 37 million people who could have had the retirement income security of the protected lifetime income provided by a pension but don’t now, and that shines a light on the many, many millions of others who also don’t have protected lifetime income.
I think, to some extent, public policy is beginning to catch up with that reality — that we simply don’t have enough people who have a reliable retirement paycheck that they can draw on that will last the rest of their lives to supplemental Social Security. I am hopeful that, for example, Congressman Richard Neal has a bill that would require that every employer, except for the very smallest employers, provide their workers with automatic enrollment in a 401(k) plan, a workplace retirement savings plan — not the same as a pension, but I think extremely important because only about three-quarters of American workers right now have access to a retirement plan in their workplace, and only about half of all workers are enrolled in a plan right now.
If you could take those numbers closer to 100 percent — it would probably be in the 90, 95 percent range — millions more workers would be saving for retirement and maybe their employers could be — they’re required to do this — encouraged to match some portion of those savings by their employees. Maybe it would become a regular part of what happens in the American workforce. About half of employers now offer, or half of employees now get, a match from their employers, some kind of a match. We could make that number go up, which would be just fantastic, so more money would be accumulated. And, you know, you referenced the SECURE Act, or I referenced it, which is the latest piece of retirement legislation, and makes it easier to have protected lifetime income in the kinds of plans that I was just describing: 401(k) plans.
You could have some kind of a protected lifetime income vehicle, like an annuity, in one of those plans. I do not think that is going to happen right away, but I think that could happen over time. The idea is we can get to a 21st-century pension system to supplement the now quite-small traditional pension system that is largely in unionized workplaces and in the public sector. I think that I am hopeful about that. There is a lot to sort out. There are a lot of questions that we must answer. What does that look like? How do you make it work? Is there a regulatory change required? Is there more legislation that is required to really make it a success? But I think it can be done.
I am one of those folks who is hesitant to rely too much on behavioral change. I do not think the reason that we have a retirement gap, a savings gap, in our country is that people are acting irresponsibly and spending their money on Lamborghinis instead of putting it into their retirement savings plans. I think the large majority of people are either living paycheck to paycheck or are so focused on their current economic circumstances and also trying to help their kids to get ahead that they either feel that they’re not able to plan for retirement or save for retirement, or they don’t have a ready vehicle for doing it, or they think it’s too complex and difficult for them to figure out how to be able to do it in a way that is sustainable for them over the long term. I think that we can help them — public policy can help to solve those problems, and also the private sector can help to solve those problems, by building in a series of defaults that help people to make the right choices, and allow them to opt out if those choices happen not to be right for them.
Things like auto-enrollment, auto-escalation of people’s contributions to their savings plans — I would like to see employers match. I would like to see the ready availability of low-cost protected life and income instruments. Maybe opting people into those — auto-enrolling people into those as well, so that we can build something that looks like it is sort of a slightly weaker version of the pension system that so many people relied on. You know, my parents were both public school teachers and they both had pensions because their unions had fought for pensions and they had gotten them. These were not bridge pensions, but reasonable, middle-class pensions. And because of those pensions, my mom lived to the age of 94 and had enough money to be able to take care of herself with the pension and Social Security; with the savings that she and my dad were able to accumulate over time. They were both Depression babies, so they were really good with a dollar. Not something, frankly, that they passed along to their youngest son — me — but they were able to live good-quality lives in retirement. And when my mom got sick in her later years, we were able to put her in a facility that was really a very caring and loving facility, because we had the resources to be able to do that. I want that for every American family, but without real, readily available pensions, we have got to build something else that will get them from here to there.
ANGELA ANTONELLI: The reality is wholesale significant change is not always easy, and you need to take incremental steps. As you noted, we have moved away from traditional defined benefit pensions to primarily defined contribution plans, and the reality is the idea of a traditional pension is not a bad idea. How can we bring those attributes of traditional defined benefit plans into the defined contribution world? Most importantly, creating that guaranteed stream of income at retirement.
At the same time, we are also dealing with the damage from the COVID pandemic and the need to address not only income issues, but we need to focus on addressing coverage and the adequacy of savings. And I am more optimistic as we emerge from the COVID pandemic and the economic crisis, certainly relative to the Great Recession more than a decade ago, that we’ll come out of this with more tools available to businesses and workers. Seth, you may agree or disagree with me on this, but I think that can make a difference in helping to get people back to being able to save again more quickly, certainly relative to a decade ago.
One of those options are the state-facilitated retirement savings plans that we have talked about, because I think they can meet the needs of certain aspects of small businesses and individuals. And then we also have the SECURE Act that passed at the end of 2019. We have touched upon this a bit; the Act introduces the concept of pooled employer plans (PEPs). And again, what is the potential for PEPs as an option? Because of this economic impact, will there be some small businesses saying, “Do I need to continue to sponsor a plan on my own? Maybe there is a benefit of moving into these pooled arrangements and having a third party manage all of it. Why do I need to do it by myself?” For some of the smallest businesses and for individuals, the state plans will be perfectly sufficient to meet their needs, and for others, these pooled employer plans can be an attractive option. As we emerge from this, I would like to think that there’s reason for hope that we do have more tools available to address coverage and adequacy and lifetime income. And then in the longer term, we have these proposals in Congress, such as Representative Neal’s that you mentioned, that could move us nationally and get more people covered.
SETH HARRIS: Yeah, that is certainly the hope. Let me just say, I think there will still be a role for the state retirement plans, even if the Neal bill passes, partly because small businesses almost certainly will be exempted from the Neal bill; right now, the threshold is 10 employees. I do not want to see that go up. I expect that, in the negotiations over the bill, once it becomes a serious moving vehicle in Congress, I would expect to see that number go up, so there’ll be plenty of businesses out there that will still need the state retirement plans or open MEPs or PEPs. But I think that we must sort of address both problems at the same time. We have the problem of coverage — that is, we have many, many, many, many working people who do not have an employer plan covering them. They do not have access to an employer plan right now.
I think that the MEPS and PEPs — multiple employer plans (MEPs) and pooled employer plans — will help with that some, but particularly in a time when small businesses and medium-sized businesses are really badly stressed by the pandemic, the likelihood that they would be willing to offer new employee benefit on their own, I think, is low. I think it will grow as the economy recovers, but I think right now might not be the prime time for MEPs and PEPs absent a mandate. If there is a mandate from Congress, I could see it happening, but I don’t see it happening in large numbers without the mandate. And let me also say, even without the crisis and without the mandate, still, I do not think you would have seen a huge number of workers covered.
The estimates I heard were actually surprisingly small, but every little bit helps. Any worker who is newly covered is a good thing. And we want to encourage as many vehicles to do that as possible, as long as it were also providing them with all the consumer protections that they need and their money is being handled safely, being invested smartly, and they’re not being charged unfair fees.
But then the second problem is the problem of adequacy, which is making sure that folks are saving enough, that they are getting matches from their employers to plus-up what they’re getting. And also this problem of making sure that you can have retirement income — enough money to be able to supplement Social Security and sustain as much of your lifestyle as you can in retirement. I think the SECURE Act is going to help with that.
One way, most importantly, is it’s going to make protected lifetime income more salient to more people by requiring that anybody who participates in the defined contribution plan gets at least one benefit statement a year that illustrates how much income they would get in retirement from that pot of money that they have saved in the defined contribution plan. It takes whatever your current account balance is and translates that into an income stream and tells you what your income would be years down the line. That is fantastic, because it’s very hard to do on your own, right? That’s something that, unless you understand how markets work and how to do discount rates, it is very hard to figure out, but having it illustrated for you and giving it a number, which we all get from Social Security now, makes it easier.
When we get an annual statement from Social Security, it says, “If you keep saving at this rate, by this age, you’re going to have X dollars and by that age you will have X plus Y dollars,” right? That is essentially what people will get now in their private retirement plans. And what they can do, very simply, is add those two numbers together and say, “Is that enough for me to live on?” — right? If they have a sense of what they are spending right now, they can compare that to the amount that they are going to get in retirement from Social Security and their lifetime income statement. They can say, “Oh, I don’t have enough.” Or “Hey, I’ve got plenty. I’ll be able to pay my mortgage. I will pay my rent. I will be able to feed myself. Maybe I will be able to go on a trip every now and then.” Just that knowledge will make it a more-salient issue.
And I think we’ll see more and more people looking to buy retirement products that provide protected lifetime income, like annuities, that will sort of make that line on the page become real and guarantee it for them; protected for them for the rest of their lives.
And the other change in the SECURE Act that I referenced earlier is that now, after the SECURE Act, it will be easier for employer-provided plans to include a protected lifetime income product, and particularly an annuity, in their plans. It had been very difficult for legal reasons. We do not really have to go into detail, but now, it will be easier for the plan providers to include annuities in those plans.
That barrier — that legal barrier — was not the only barrier. There are lots and lots of other barriers. There are attitudinal barriers and structural barriers and technological barriers that have to be sorted out, so I don’t think everybody should expect, in the next couple of months, to start seeing annuities popping up in their plans, although, in my view, that would be a good thing. But I think it is going to come. And I know that there are people who are working on this now and are thinking about how to structure their products, to make sense for the employer plan market. Right now, they are selling in the individual market, and there are products that might make sense there. We can argue about that, but they would not make sense in the employer plan market, so they are going to structure them differently. They are going to work with employer plan sponsors and asset managers and the folks — third-party administrators — who run these plans for them, and I think they are going to structure something that will make sense for a lot of workers.
It’s going to take time, but I think we are going to get there, and I think that’s going to make a meaningful difference, because with these benefit statements and lifetime income illustrations at hand, folks are going to say, “Hey, how do I get this? How do I get this stream of income that you were telling me about that I really would like to have to give myself and my family some security in retirement?”
ANGELA ANTONELLI: I do think recent surveys have been showing that, increasingly, workers want and value and hope that their employers will help them figure out not only how to save, but how to create that stream of income at retirement.
SETH HARRIS: I think that is right. Let me just add one other point. Folks hear the word “annuities” and have questions in their minds. There is some survey data that suggests that people kind of don’t like the word annuity, but if you tell them what an annuity does, they want it all. They want exactly what an annuity does. One of the good things about having them in employer plans is that they will be explained. People will be able to understand them better. There will be benefits people who work for the employer — there will be people from the third-party administrator, other service providers, who will help workers to understand them better. And I think that is really going to make a meaningful difference. And also, let me say, we may see some innovation.
We may see some things that are not annuities offering protected lifetime income to folks. It is hard because there is an insurance component to it, but I’d like to “see a thousand flowers bloom” and see how it sort of comes out. Planned sponsors are pretty savvy about this. They are also subject to a fiduciary duty to make the right choices for the people that they serve, and I think that will ensure that we get good-quality decision-making. That is what you asked me before — if I’m an optimist. I am an optimist about that. I think that is heading in the right direction.
ANGELA ANTONELLI: Let us shift gears a little bit. There has been quite a bit of activity here in the summer of 2020 by the Trump Administration. The Department of Labor issued new guidance related to ESG and private equity investing, and then also issued some rulemaking related to conflicts of interest. And then, as you also know, there is the DOJ — the Department of Justice has weighed in on the CalSavers, the state-facilitated retirement savings plan litigation. What are your thoughts about these recent policy and legal actions that have been taken by the Trump Administration? We also know that there is an election coming up in just a matter of a few months. If there was a change, would some of these recent policies remain in place or be subject to reexamination?
SETH HARRIS: Wow. You could not have made that a bigger question, for goodness sake, Angela. That is a pretty big question, so I’ll do my best — I’ll try and cover as much of it as I possibly can. Let us start with using ERISA as a sword against the state retirement plans. The Justice Department or Labor should not be doing that. The state retirement plans are structured so that they are not ERISA plans. That issue has already been brought to court, and the district court has found that they are not ERISA-covered plans, so the federal government should bow out and let the states do what they’re going to do, and try and figure it out. As long as they’re protecting the people who participate, the federal government should not intervene. That was the position of the Obama Administration. I would expect that to be the position of the Biden Administration, and it should be the position of the Trump Administration, but apparently, sadly, it is not.
We do have a new proposed prohibited transaction exemption from the Labor Department. That is a term of art in our world having to do with conflicts of interest in investment advice that are given to people who are saving for retirement. This is an effort by the federal Labor Department to reconcile the standard of care that applies to people who give investment advice with a new standard of care that was proposed. Actually, it was just implemented a few days ago, finally, by the Securities and Exchange Commission (SEC), for broker-dealers and registered investment advisors — a so-called best interests standard of care when they give advice, not just with respect to retirement, but also anytime they give investment advice, and also a similar standard that was just proposed as a model standard by the National Association of Insurance Commissioners. What the Trump Administration is trying to do is to reconcile all of the standards. The problem is that the ERISA standard of care has a much-higher standard of care and is a different regime than state insurance regimes and the securities regime at the SEC.
I think that we will have to see how it evolves. It is only a proposed exemption right now. We’ll have to see how it comes out in final language. My guess is that they will not change it very much. I think it is not out of the question that they will get sued to try to block the prohibited transaction exemption. I know a lot of consumer groups are justifiably very unhappy about this proposal, as they were unhappy with the regulation best interest that came out of the Securities and Exchange Commission. I think there well might be a fight, because I think it is quite controversial, and we’ll have to see how that comes out in court.
The Labor Department’s guidance on environmental and social investing is, to me, utterly gratuitous. There’s no reason at all for the Labor Department to be saying to plan fiduciaries, who already owe an obligation only to make decisions that are in the best interests of their participants — in the exclusive interest of the participants and beneficiaries of the plan — how they should and shouldn’t decide to invest their money.
I think that it’s sort of astonishing that on the one hand, they’re saying you can’t do ESG investing, but the other side, feel free to put your money into private equity, which is some of the most-risky investing around — you know, it’s okay to put workers’ money at risk — it’s not okay to put it to work in a way that makes them money, but also is good for the environment, is good for the society, is good for job creation. Kind of in my view, it is more than a little bit hypocritical and wrong-headed. I would expect to see those policies reversed in a Biden Administration because they are not regulatory. They do not have to be regulatory. And I think it is likely that we would see a change in the proposed prohibited transaction exemption having to do with conflict of interest in a Biden Administration as well. Consumer advocates like Senator Warren and some groups out there have been quite vocal about the fiduciary rule. I think that both the Labor Department and the Securities and Exchange Commission will put a much-higher standard of care in place that looks more like a fiduciary standard of care.
ANGELA ANTONELLI: Seth, you served in the Clinton Administration and you served in the Obama Administration as the Deputy Secretary of Labor, and also as the Acting Secretary of Labor, for several months. As I previously noted, we have an election coming up, and somehow I have the feeling, Seth, that people may be asking you your opinion about a variety of policy issues. But if you’re looking to the future of retirement policy, what do you think should be the top two or three priorities as we look to 2021 and hopefully a recovering economy? What do you think are the most-important things that should be considered by an administration and/or Congress?
SETH HARRIS: There are sort of three big sets of issues in retirement: coverage, adequacy, and leakage, meaning money going out of retirement plans for reasons other than retirement income. I’d like to see Congress and the Labor Department, and the Treasury Department take on all of those issues, and I think they can do it. With adequacy, we talked about the Neal bill and I think that would significantly help. Helping to expand state retirement plans would also help dramatically with coverage. We should be aiming for as close to 100 percent coverage as we can possibly get. On the adequacy front, we want to certainly incentivize as much as possible that low-wage and middle-income workers get whatever kind of support, either from the saver’s credit or from their employers, that they can get to supplement the amount of money that is going into their plans.
Also, that they have a ready way to turn whatever pot of money they are able to save into protected lifetime income, because otherwise, they’re at risk of outliving their savings. And that really, I think, is a very dangerous risk, so I’d like to see auto-escalation in plans, but I’d also like to see more options available so that people can accumulate as much money as possible with support from the tax code and support from their employers.
Then on the leakage front, I think that we need to be really ever-vigilant about the fees that are being charged to people who are saving for retirement. We want this money to be used for people’s futures, not necessarily to enrich others. I want to make sure that people are not able to take out money just for spending, unless it really, truly, is a crisis situation.
That is another big difference between a pension and a 401(k), for example: You couldn’t take your money out of a pension, as you said earlier in the podcast, and you can take money out of a 401(k). Well, then people are put to that difficult choice of “Do I take it now? Do I spend it now? Do I save it for the future?” I’d like to see really aggressive efforts to get people to put money in, to keep that money in, but also, you don’t want to lock up their money to the point where they’re unwilling to put it into retirement savings in the first place, because they really worry because they don’t have another form of savings available to them. There are a lot of proposals out there about emergency savings plans. I think those are worth looking at as well, although ultimately, you can only save that dollar once. You can’t save it in multiple places.
Ultimately, the solution to all of this is to raise workers’ incomes, to create jobs that put people into the middle class so that they’re able to save — that they have enough income to live today and also save for tomorrow. That would be the biggest solution: an aggressive effort to rebuild the American middle class. That includes a secure retirement, but the only way we get there is if workers’ wages rise in real terms and inflation-adjusted terms very, very significantly. I left that for last, but I think that is the starting place for any meaningful strategy going forward.
ANGELA ANTONELLI: Seth, you have wrapped it up beautifully, and I will also say thank you so much for your kind words about the work and the impact of the Georgetown Center for Retirement Initiatives. Thank you for your time today participating in “The State of Retirement” podcast. We have learned a lot about where we are with the state of retirement today.
SETH HARRIS: Thank you, Angela. Thanks for having me. A pleasure. Keep up the great work.
ANGELA ANTONELLI: Thank you so much. Thanks for listening, and we hope you come back again to hear from another leader, innovator, or influencer shaping the future of retirement. Until next time, thanks for joining us.