December 8, 2023

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Retirement Weekly

Opinion: The way we save for retirement
needs changing: 5 ways companies canhelp the 401(k) generation
IBM’s pension plan comeback challenges us to build a better retirement system
By Zach Buchwald
The U.S. retirement system has
undergone a radical transformationthat will impact almost the entire
working population. Not long ago,most American workers had thebenefit of employer-sponsoredpensions that provided a lifetime
income stream in retirement.
But companies replaced themwith savings instruments like401(k) plans. It was a massive
risk transfer from companies toindividuals that now requires
individuals to make hard decisions
about how much to save, how
to invest, and how to make theirmoney last.
We are about to experience theconsequences of this shift, as thefirst of the “401(k) generation”
begins to retire. They will face aharsh reality: they have not saved
enough, they have not invested
enough, and their money will notlast long enough. The next waveof retirees will live for an averageof 20 years in retirement, but their401(k) plan savings along withSocial Security benefits will coverless than half their expenses.
Instead, they will have to keep
working, or hope that their families
or the government will help them.
This will create a systemic burdenthat will strain our society andmake it even harder for the next
generation to build wealth.
This crisis is an opportunity to fix
our broken retirement system.
Americans largely depend on theiremployers for retirement savings,
so we need to strengthen workplace
plans to make a real difference.
IBM, one of the world’s oldest
and most successful technology
companies, has made somethoughtful changes in how it helps
employees prepare for retirement.
Starting in 2024, IBM will stop
matching its employees’ 401(k)contributions and will instead

guarantee a prescribed rate of
return in its old pension plan.
Clearly this change will save IBM
money in reduced matching, andwill directly reduce its cost basis.
But it also reduces the investment
risk for workers, and can beconverted at retirement into astable income stream — thereby
offering clear advantages for both
IBM and its employees. Best of all,it provides greater certainty in theretirement outcome, and shares
the retirement savings burden
between employer and employee.
The changes at IBM show how
we can rethink retirement plans tobetter serve all constituents. An
ideal model will blend some of thepositive features of 401(k) plans
like portability, tax benefits, andwealth growth with the stability,© 2023 Dow Jones & Co. Inc.
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employer contributions and lifetime
income feature of pensions.
Fortunately, we can work within
the architecture of the current
401(k) model to achieve the mostimportant goals:
Automate both employee
contributions and employer
matching. People tend to save too
little and too late, and employer
matching is often inadequate orburdened with complex vesting
rules. Contributions to retirement
plans should become automaticand always be paired with fair
employer matching.
Make retirement investing moreaccessible. 401(k) sponsors
should simplify their plan designby offering fewer, less complicatedoptions at low fees. This will help
participants avoid confusion andstay invested for the long term.
Resist the digital age. Participants
can now change or withdraw their
401(k) investments with a few
clicks. This is one case whereeasy access actually harms theindividual, because it can lead to
impulsive trading decisions which

tend to lower long-term returns andalso result in penalties and taxes.
Trading decisions should not be
so easily accessible — instead thetechnology should be used to drive
financial literacy and transparency.
Provide lifetime income in theplans. People that do save enoughduring their working years tend to
hoard their assets in retirement
because they worry about outliving
their savings. These folks need
lifetime income products, such as
an annuity inside the retirement
plan. A small number of employers
offer “institutional annuities” in theirplans today, but this feature should
be normalized to provide retirees
with dependable lifetime income.
Invest 401(k) assets in taxadvantaged programs atretirement. Most people movetheir 401(k) assets to financial
advisers when they retire. Theseassets should always be managedwith taxes in mind. Some advisers
today use models that boost aftertax returns and cut taxes by anaverage of 2% compared withregular mutual funds. This is a big
advantage and should become
standard for retirees’ accounts.

We have blueprints from aroundthe world that show how effective
these features are: Australia
mandates employer contributions;
Canada and the U.K. have madetax-free investing standard
in retirement accounts; andof course, here in the UnitedStates, Social Security (for all itschallenges) was set up to provide
lifetime income to retirees.
Retirement security boosts theproductivity and competitiveness ofthe economy, and there is strong
support from across the political
spectrum to improve the retirement
model. IBM recognized this, and soshould all corporate leaders. Thisis the rare opportunity for a winningarrangement among employers,employees, and society at large— to improve the quality of life for
employees in retirement, and tocreate a shared stake in the futureof our country.
Zach Buchwald is chairman
and chief executive of Russell
Investments, a global investment
solutions firm that serves
institutional investors, financial
intermediaries, and individualinvestors.