Defined contribution plans, and 401(k)s specifically, are increasingly under attack, criticized by think tanks and academics for perceived (yet easily refuted) flaws. What—and who—is behind the effort? Are the criticisms resonating and why are they happening now? Does the industry need to do a better job defending itself and are we effectively illustrating the 401(k)’s value proposition?
Michael Davis, Head of Global Retirement Strategy for T. Rowe Price and a former Deputy Assistant Secretary for the Employee Benefits Security Administration, joins American Retirement Association CEO Brian Graff for a lively and informative discussion.
Defined contribution plans, and 401(k)s specifically, are increasingly under attack, criticized by think tanks and academics for perceived (yet easily refuted) flaws. What—and who—is behind the effort? Are the criticisms resonating and why are they happening now? Does the industry need to do a better job defending itself and are we effectively illustrating the 401(k)’s value proposition?
Michael Davis, Head of Global Retirement Strategy for T. Rowe Price and a former Deputy Assistant Secretary for the Employee Benefits Security Administration, joins American Retirement Association CEO Brian Graff for a lively and informative discussion.
I think it's myopic to say that the DC system shouldn't be there and shouldn't have those tax benefits because it's been such a great provider of retirement security for the middle class.
Speaker 2:DC Pension Geeks brings you exclusive conversations with top retirement policymakers and regulators in and around Washington DC, hosted by Brian Graff, an attorney, accountant, former Capitol Hill staffer and CEO of the American Retirement Association. If you're looking for an insider's view of all the twists and turns that Washington takes on the road to ensuring a secure retirement for millions of Americans, you're in the right place. Welcome to DC Pension Geeks.
Speaker 3:Hello everybody, welcome to yet another in the series of podcasts, dc Pension Geeks. And you may not know this, but my colleague and friend who's joining me today is a DC Pension Geek too, although he resides these days outside of DC. He did his time in Washington DC and we'll get into that in a second. But I'm very fortunate today to have Michael Davis, the head of global retirement strategies at T-Row Price, with me today and we're going to talk a little bit about what his experience was like being a policymaker in DC, but also what's happening now in terms of the attacks on the 401k system, and I'll give Michael an opportunity to talk a little bit about his new role and how T-Row is trying to be a player in terms of helping to shape a positive retirement policy.
Speaker 3:So, michael, I like to start these things by giving you an opportunity to tell your story, your backstory, on retirement. Most people sort of accidentally find the retirement business. Very few people grow up like myself. At an early age, five or six knew that I wanted to be in the retirement I'm just kidding, wanted to be a retirement policy person. So how'd you find yourself here?
Speaker 1:Well, great question, brian, and first of all, great to be here, great to be with you again. We obviously work together a lot. When I was in policymaking and you came to see us, you always very thoughtful, prepared, active in these debates. We always found those conversations very helpful. So great to be here with your audience today.
Speaker 1:So just by way of background, yeah, just like you, I did not sort of grow up thinking that this would be my career path.
Speaker 1:I wasn't really sure what I was going to do with my finance undergraduate degree but I started in investments back in 1992, I was in investment banking and, to back up even further, my master's actually was in public policy.
Speaker 1:So I've always been intrigued with this nexus between sort of policy and finance and I think retirement is really the perfect sort of realization of that, because I think this is an area where you really still have bipartisan policy affecting it and the retirement outcomes are so shaped by what happens in policy. It's great to sort of have those joint experiences. So I did sort of six years in investment banking at JP Morgan in New York. I found my way into the asset management division at JP Morgan in 1998, covering large pension and 401k plans on the upper Midwest. Then I was asked to step into a management role, which I did, and essentially I'm still doing it today. So I've been in this business for a very long time and I love it. I think again, it's a perfect mix of sort of doing good and doing well at the same time, and I do think that we try to act in a way that is good for American retirement outcomes and I just happen to do it from a different seat.
Speaker 3:Well, you did take a little bit of a break from that very impressive resume to spend, like I said, do your time in Washington DC for the Obama administration as debt back for the Employee Benefit Security Administration. Talk to me about what your experience was being in business where rational people are operating in irrational ways Enough kidding, I'm not kidding, I'm not kidding. Then kind of moving into the government world, just the way government I certainly don't mean that government is always acting irrationally, because I often say I have a lot of good friends and colleagues in the government, but the process for how government makes decisions is clearly different than how business makes decisions. Let me talk a little bit about how that transition was for you, as well as what surprised you in terms of dealing with the characters that are in DC.
Speaker 1:Yeah Well, it's funny, brian, because I thought, like you thought, that I'd see a lot of irrational things that didn't make sense in government. But I always say that to understand what people do, you have to understand their influences. I think government actors operate in a very complicated and complex environment where you have a lot of stakeholders that are involved. What comes out the other end may feel irrational to people, but if you looked at all the different and disparate influences, it makes sense. I found a lot of really intelligent people who wanted to serve. They felt like that was their calling and they chose to use their intellectual gifts in that way. I just found every day to be just fascinating and just very dynamic.
Speaker 1:You think back to those first days of the Obama administration. There was so much euphoria around his election and so many people that just volunteered to step forward, that were best in the field to say look, I want to make a difference, I want to help this president be successful. Then, on the other hand, you had a lot of challenges in the economy at that time, with the failure of firms like Bear Stearns and others that were really hurting post the financial crisis. I think it was an intense time, but also a time of great change and great pace. It was just an honor to be a part of it.
Speaker 1:When I left JP Morgan, I was running the Western US for our institutional business and when Obama ran I was just very compelled by who he was as a candidate. I never thought in my lifetime I would see a black president. I always wanted to be able to say to my kids that look, you saw this really momentous thing happening. What did you do about it? I wanted to say I did more about it than just clapped and gave applause. I wanted to actually help. I thought he might benefit from people who had business experience, knowing that he had a lot of circles that were more policy and legal oriented, and I thought I could help. I stepped into, as you said, deputy assistant secretary in the US Department of Labor in the division called the Employee Benefits Security Administration that has administrative oversight over retirement and particularly the 401K and the retirement system for private plans. It was a great experience. I thought the people there were just really extraordinary and it was just an honor to be a part of it.
Speaker 3:One of the things that a lot of folks who tend to criticize the work that the regulators do is that they don't understand how the private sector operates, that there's a disconnect between the policy that you're trying to achieve but the practical understanding of how business operates. Do you think that gap exists and do you have ideas about how we could bridge that gap?
Speaker 1:It's a great question and I apologize for the noise outside as an ambulance passing, but yeah, to be honest, I do think that that gap exists in some respects and you know there are a lot of people in government that have been there a long time but I think that people did have a recognition that there was an opportunity to bring in more people that had business experience. I think, in the case of labor and retirement policy, there are a lot of advisory councils that the department does leverage. In the case of retirement, in particular, there is the Eris Advisory Council that is called for by statute to appoint people with business experience that can be very knowledgeable and just advise and provide input. I would also say, though, that, with respect to my own appointment, I think I was one of the first people in that debt sec position that had business experience. So a lot of people before me were more policy oriented and had had a lot of legal and policy backgrounds, but they intentionally brought me in because I had that business experience, and you know there were meetings I was in where you know I thought that that experience was very helpful.
Speaker 1:So I remember some debates and I can use one example where there was a policy request to have by law every plan be obligated to go passive and say by, according to ERISA, that we would sort of regulate only passive assets be used in those plans. And I just remember saying that is not a good idea. You have to give plan sponsors a latitude to make decisions for what's best for their participants, and so to bring that voice into the discussion I thought was a gift, and when I was in those rooms I always was thinking about channeling those voices of the plan sponsors and the advisors and the consultants that I knew, to make sure that that voice was heard. And I think that since I was in that role, they have since appointed other people with business expertise in those roles.
Speaker 3:You know, I think that's right and I think that I remember that debate. I remember talking to you about the time. You know it's kind of funny I was. That idea was was being pushed by a former congressman named George Miller who was at the time the chair of the House Education and Labor Committee. So you know, not an insignificant member of Congress, you know, and at the time, if people remember, that there is a sort of focus on obsession with fees and a big part of the work that you all did was on fee transparency. There was a lot, a tremendous amount of work that we supported that you all did in that regard and it has, I think it's done a great job in terms of helping plan participants ultimately.
Speaker 3:But it's funny that that argument around passive, you know there's this, you know concern about the market being to standardize. Now people are complaining that target date funds there's a recent Wall Street Journal editorial and if you saw this about the fact that target date funds are too too, you know, standardized and that's causing quote schisms in the market. But could you imagine if the entire you know every ERISA plan can only be invested in passive index funds?
Speaker 1:Well, that's what I was saying at the time. Again, you know the marketplace. I just think about ERISA as creating broad guide rails, right where you provide sort of a guide rail for people to exist within it. And I think about the same thing in sports, where you have referees that say look, you know, we're not going to legislate the game, we're going to allow you guys to play, but there are some guide rails that, if you go beyond this really broad guide rail that we do have to sort of, you know, let you know. And I think of ERISA. The same way, you don't want to micromanage what people are doing. You want to provide sort of broad parameters within which that they can operate. And that debate, in particular, was a very spirited debate, as you might recall.
Speaker 3:And.
Speaker 1:I remember being directly involved in some of those debates up on the hill around it. But to your point about transparency for AB2, which gave sort of transparency to plan sponsors from providers, 445, which provided transparency to participants, I used to say look, you don't need to legislate fees and really have fee caps and those kinds of things, Just provide the information. Those plan sponsors have the information. They are compelled to do something with it. That's all you have to do. You just have to nudge right and I think it's made a big difference.
Speaker 3:No, clearly it's made a huge difference, without question. I think that that work, you know, besides stopping forcing passive index funds as the required investment, I think that work around you know fee transparency, probably. You know, probably some of the things that you're most proud of in your time there. That's correct. And what's ironic about some of the debate today? We kind of moved away from passive you know, forcing passive index to, you know, prohibiting any thinking or consideration of, you know, climate-based issues, as you know, in effect, kind of another from the kind of opposite direction, boxing in plan sponsors as to what is okay and what isn't okay.
Speaker 3:And I, you know, part of the question I have for you here is why don't they just leave these plans alone? I mean, there seems to be every. I mean I've been doing this for 30 years, michael, I gotta tell you. I mean I kind of I'm wistful for the good old days when, you know, maybe there was like three or four bills a year that were introduced to retirement. I mean it's a cavalcade of proposals that are constantly being introduced to you know, do this. You know tinker with that, tell people how to invest, tell people how to do this. We'll get into some other crazy ideas. You know why do you think that is? Why is there more of an obsession by either administrations or Congress around the 401K plan?
Speaker 1:in your view, I think there are two things that are driving it. One, I think, with so many baby boomers retiring, that retirement as an issue itself has become more resonant for the country and there's more concern around it. There are more observations around it, there are conversations around adequacy have we done all the right things to make sure these individuals have enough in retirement? So I think it may have felt sort of like a problem that was a long way off, but that issue is here now and a lot more people are experiencing that issue and they vote. So I think that that is one of the things that's driving it.
Speaker 1:The other thing I'd say is that I think there are certain issues in retirement that have become somewhat politicized and I think ESG is one of those issues where that has become sort of an issue to jure and, as you and I know, every administration, I think since Clinton, has had some sort of pronouncement on it and you know Congress has gotten involved and you know has gotten to the States, and so you know I think some of this politization has gotten a little bit overblown and I think it's just gone far beyond the substance of the issue. I think you know most investors are really thoughtful about these issues and again give them the latitude to make good decisions, give them the guide rails within which to operate and for the most part they make good decisions around it. And you know, I just wish some of that would die down.
Speaker 3:So you mentioned, you know, expertise, right, you know there's been sometimes a gap of expertise among policymakers, either, you know, in administrations or on the Hill, expertise being experienced and actually how these plans operate and how plans sponsor something. And there's certainly a deficit of expertise among economists. And so you know, we're seeing and I know you know this, over the last several months, the last just one study after another highly critical of how 401K plans are performing in terms of delivering retirement savings to American workers. And you know, oftentimes you know they've got some, you know there's been some pretty outlandish ideas from let's get rid of the 401K and use all that money to pay for social security. Okay, and by the way, it's not an insignificant amount of money, I'll get rid of the 401K. The quote tax expenditure, which is the way Congress measures the revenue costs associated with just DC plans, not even IRAs, is one and a half trillion dollars over five years. So you know that's not. You know, maybe one and a half trillion is what it used to be around here, but it's still not pocket change. And then you know you've got our friend Teresa Gilliducci, who's got her proposal to, you know create a fellow run 401K plan and offer a generous matching contribution of 5% to employees that are in the federal program. But of course, you know businesses won't just. You know businesses will just ignore the fact that they can get this free money from the government and still keep on doing their plans, at least in her mind, which I think you know doesn't make any sense.
Speaker 3:But where do you? I mean all this is rooted in this kind of pervasive view, michael, that the 401K is failing and a lot of it's, you know, based on different surveys. Teresa hangs her hat on this Michigan University of Michigan survey. That that seems to. She seems to think that people can accurately assess what their retirement savings are. There's the consumer population survey. No one seems to recognize the fact that the last several election surveys really have shown that they really don't aren't very accurate in terms of what people do, what it's behind all this? Why are they? Why do you think all this negativity is coming up all of a sudden?
Speaker 1:Well, it's a great question and I know a lot of the people that have submitted those studies and written books about them, and so I'm not going to take on anybody by name. I would just say in general, we would disagree. I would say that some of those attacks they don't really start with. What is the system done since it's been in place? I think you really have to start with an accounting of sort of the history and what those systems have really done. So you know. Let's just talk about the DC system. So you know and this is the Department of Labor data in 1975, only 11 million workers were covered by DC plans. By 2021, that number has risen to 115 million. At its peak, I think DB plans, which I think a lot of us would agree, gave a lot of retirement security to a lot of people. At its peak covered maybe 40% of workers. Dc plans cover a higher percentage of workers, I think, right as of the last by far.
Speaker 1:But yeah, according to eBree data, much higher. So I think, also from a diversification standpoint, dc systems have really helped plan participants to diversify more. You know, you look back in 2005, 65% of workers in 401k plans had money and equity funds and short term investments. You look at 2020 data and that percentage has fallen to less than 50%. A lot of people now are in target date funds, which are much more diversified, provide professional management. They automatically rebalance all the things that I think people say is helpful. And then, from an adequacy perspective, the DC system has created more than $25 trillion in retirement savings.
Speaker 1:Well, I think part of the issue that people are attacking is they're only attacking the DC system in isolation. We would say that the DC system has to be viewed in combination with the social security system. So, for lower paid workers, social security is going to provide a lot of the income replacement for those individuals as you get into sort of higher middle class levels, a greater percentage of that retirement income and that income replacement comes from DC. But but I think it's, it's it's. I think it's myopic to say that the DC system shouldn't be there and shouldn't have those tax benefits because it's been such a great provider of retirement security for the middle class.
Speaker 1:And you know we think that that sort of existence of DC, particularly for higher wage workers, for whom social security is going to have a much lower portion of their overall income replacement, to deny the role that DC plays in those individuals retirement experience, I think it is short sighted and doesn't do justice to the benefit that it provides for a lot of middle class workers in particular. Now, that's not to say that there aren't issues and we do think that from adequate adequacy perspective, from a coverage perspective, there's obviously work to do. The federal auto IRA bill, as you know, the Neil bill, we think does sort of extend a lot of that coverage principle and we're not against that. We think that those things are good to expand coverage, extend adequacy. But to say the system itself has failed, I think is a wrong conclusion to reach. We think the system has worked, is done a lot of great things for a lot of people, particularly from the middle class, and we're seeking to extend it and support it with some of the things that Congress is talking about right now.
Speaker 3:So this, I know you don't want to name it, but I'm not Similarly restricted, so I'm going to. I'm in the foxhole, michael, on a daily basis on this and, and you know, just yesterday CVS market watch, a certain economist whose name is Teresa said that the system is a complete failure and it's only actually worked for the top 10% of Americans based on income, as in. It's failed for 90% of American workers. And you know we can sit here and we both know that's wrong, right, right, but the. But I think the problem isn't so much that we know it's wrong because we do.
Speaker 3:I don't think the industry is doing enough to respond to these attacks and actually tell our story, because your point is exactly spot on. You can't look at it in isolation. If you measure it based on replacement income, the truth of the matter is, for lower income people, a combination of a 401k and so security is actually better income replacement ratios relative to higher income workers. And if you got rid of social security, if you got rid of the 401k and use that money for social security, the lower income people would continue to be pretty good because social security does, as you said, a pretty good job of replacement income for them it's, and the wealthy people though, they'll figure it out and it's. Middle income Americans are really be the stuff, that ones who are going to be the troops one suffering here because the private savings to employer based plans has been the way they have generated wealth for retirement.
Speaker 1:You say it very well, brian. I would add two additional facts to what you just offered to your point about replacement rate. I see I research that showed accounting for taxes, those post tax, that combination of social security and the DC system generates roughly about 90% of income replacement. So and this is the first several years of retirement, so that's pretty high and that is a fact that is not being shared in some of these debates, which I think is a disservice.
Speaker 1:The other thing I would say to your point about replacing tax benefits for DC and sort of redirecting the money and social security, that that for us is a very dangerous precedent because what it would suggest is you want to start using general revenue to pay for social security, because it's not a good thing. So that would make social security more dependent on the budget process, and one only needs to look at how those budget processes have worked the last few years to say, do you really want so scared to be dependent on it? So we think it's a very dangerous precedent. So security should continue to be sort of self funded. We think that's very important to protect. So our view is, from a policy perspective protect social security but also do the same with DC because, again to your point, the middle of the market benefits a tremendous amount from that system and that combination of that plus or security is an ecosystem that we think should not be abridged.
Speaker 3:How do we do as an industry, then? How do we do a better job of telling this story? We have this tendency, Michael and I'm not, this is not directed at Tiro If all of the record keepers and asset managers were on the screen right now, I would say this universally we'd have this tendency to talk about the stress, the fact that people aren't saving enough. We have this tendency. It's almost like we have a self-esteem problem. We have this tendency to focus on the things that we do wrong, right, Don't we? There's too many hardships, people taking too many loans, there's too much leakage. People aren't saving enough. You get where I'm going here, and I think having some self-reflection is a good thing, but only up to a point where I think, to some degree, it is used against us.
Speaker 1:Well, I think about this in a lot of ways.
Speaker 1:I just think about there's so many different examples of systems at work but need to be improved. I'm a person I watch a lot of National Geographic and Smithsonian on television and I'm really obsessed with these aviation shows and just the science of flight. And I just think about the landing system. There's so much sophistication that goes into how a plane flies, how to optimize it, and I think about the flaps and the landing gear and how they work in combination and the hydraulics, and you abridge any one of those elements and the ecosystem doesn't work. And I would say the same thing about the retirement system you abridge any of those really key elements and the whole system itself doesn't work. That's not a story that gets as much sort of press attention, but that's the truth. And I do think, with respect to what the industry can do better, I would say the industry is getting organized around this and we are not going to take this lying down. And I would say that in my opinion, brian, it's not really a defense of the industry, it's the defense of the system.
Speaker 3:Yes, it is.
Speaker 1:There's more comprehensive story about what is working for working Americans and for the middle class, and we are organizing and tell that story and you know my firm to our price. We are working on research to be able to tell that story. We want to raise our voice. We know some of the trade groups are doing the same. We know other firms are doing the same. So we are gearing up for this conversation and we know it's going to be an extended discussion.
Speaker 1:The other thing I would say is for your listeners this is the 50 year anniversary of ERISA and this is a big year in the retirement industry overall. There's a big event that's happening in September. There are a lot of policymakers and members of academia that will be there. We will be a part of that discussion there. We think this is a really big year in the history of our retirement system, one of the oldest in the world. So this is a great year to have these debates. We don't shy away from the debate, but we want to tell the whole story and we think that the whole story being out there, the more that we tell it, the more I think Americans can really appreciate the benefit that is actually provided.
Speaker 3:I think it's really important. You know, obviously, you know we're in the forefront here of fighting the fight protecting the 401k, and I think it's really important that the key stakeholders, like yourself, be vocal as well. And I was very excited to see your announcement as a company about wanting to get more involved from a policy perspective and the creation of this. You know, global retirement strategies unit that you're heading, michael, can you? Because I mean, if I I'll say this, I mean historically, tiro really has not really wanted to be out there from a public policy debate standpoint, from just from a corporate philosophy standpoint, and so I think it would be helpful for folks to hear you know what's different, what's changed and what are you guys going to be focusing on and what they can look for from Tiro in the future.
Speaker 1:It's a great question, brian. Thanks for asking it. I would just say it's a general matter. We used to say when I was in Washington that if you're not at the table, you're on the menu, and it's really important not to be on the menu. I think that these conversations are going to happen with or without us, and we think that, look, we represent a lot of plan sponsors and advisors and consultants and intermediaries and individuals and it's important for us to have a voice, and so we are working to raise that voice in Washington. So, just as a firm, we sort of look to sort of increase our brand awareness in terms of who we are.
Speaker 1:To your point, a lot of what we do is retirement, so over 68% of our total assets are retirement. That's roughly almost $970 billion. We record key for over 2 million participants. We have an industry leading target date franchise but, as we think about it, we have all these different touch points around retirement in the US and actually around the world where we think those insights have value. We certainly have seen the value that that research and those insights can have on Capitol Hill and we want to share more of that insight to help move this conversation forward for the system and to support the system. And so with this global retirement strategy effort, it's really around connecting those different touch points internally and telling a more comprehensive story in terms of what we know about retirement and using that knowledge to drive this conversation forward In Washington, in the industry, with our clients, and really trying to be more of a help to this debate as this debate continues.
Speaker 3:Well, michael, thank you, because I think I could not be happier to have you guys involved. Have you involved. Your input is going to be invaluable. The debate's coming. I think we both know that the Tax Cut and Jobs Act expires at the end of next year. So regardless of who wins either the White House, who wins the House, who wins the Senate between Democrats and Republicans, it's really not going to matter there's going to be a tax debate next year in the new Congress and whenever there's a major tax legislation, the 401k kind of gets looked like a piggy bank that they can raid to pay for other stuff, and it's up to us to make sure that they don't do that and they leave what is really an incredibly successful system in terms of creating wealth for the middle class alone. So thanks for your help on that, thanks for being involved and thanks for taking your time today to talk with me today. Really appreciate it, michael.
Speaker 1:Really enjoyed it, brian, see you.