Research and consulting giant Morningstar was cited over 40 times in the final fiduciary rule release, officially called the Retirement Security Rule. The reason was largely due to the data and information for which the company is known.
Aron Szapiro, Head of Government Affairs with Morningstar, joins American Retirement Association CEO Brian Graff for a wide-ranging discussion about the rule and its future implications, as well as recent attacks on the country’s private retirement savings system. This is an episode not to miss.
Research and consulting giant Morningstar was cited over 40 times in the final fiduciary rule release, officially called the Retirement Security Rule. The reason was largely due to the data and information for which the company is known.
Aron Szapiro, Head of Government Affairs with Morningstar, joins American Retirement Association CEO Brian Graff for a wide-ranging discussion about the rule and its future implications, as well as recent attacks on the country’s private retirement savings system. This is an episode not to miss.
Financial services firms are highly innovative. You heard a lot of those arguments back in 2015 and 2016. And yeah, that rule was vacated, sure, but you saw a lot of changes, a lot of really innovative and positive changes in response to that rule before it was vacated.
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:Well, hello everybody. It's been a little minute or two, probably due to the Napa Forward Case Summit taking up so much of our time here, but we're back at it. Another edition of the DC Pension Geeks podcast. And you know, we're very fortunate today to have someone that a lot of people probably don't realize is involved in policy. His name is Aaron Shapiro, he's the head of government affairs of Morningstar and you know, aaron, thanks for being with us today. Let's talk a little bit about you, if you don't mind. How did you end up in DC? How'd you end up working on policy issues? What's the Aaron story?
Speaker 1:Yeah, well, I've really sort of split my career evenly now about 10 years in government total and now just came up on my 10-year anniversary at Morningstar. So I was just always interested in politics and policy. I had the real privilege, certainly from a learning perspective, of a first job working for the New Jersey General Assembly Majority Office, and that is how I got interested in retirement security issues, because we had a I don't know billion dollar deficit to close. And we're sitting around the caucus room and the budget person says well, you know, we could go from projected unit credit to EAN, and I'm sort of like what do those words mean and where did this money come from? And so that really got very interesting.
Speaker 1:And I worked at the USS Government Accountability Office for a couple of years and that was fascinating. A lot of different issues, but I really found that retirement was good to work on because generally it was often bipartisan consensus. Things were happening. This was right after PPA was passed, so there was consensus. Things were happening. This was right after PPA was passed, so there was a lot of implementation happening. And that's, you know, that's where GAO can really, you know, help inform Congress of what's going on, make recommendations to agencies. There were mandates to the agency in that as well. You know did some stuff that's. You know I think most people would find very boring, but I found really interesting so I knew I'd kind of found my spot.
Speaker 3:Well, I mean, I think everyone listening to this podcast can probably attest to the fact that most people find what we do boring, but we find it very interesting. Pretty common theme with people in the retirement plan business. You mentioned the government accountability office. You know we haven't had anyone from GAO on the podcast and I think a lot of people don't even know what the heck GAO is and what they do. So would you mind sharing, because I know I mean we do. They reach out. I remember when you were at GAO you reached out to us with some questions and I recall I mean you know we are constantly being not constantly, but pretty regularly being asked by them for input on projects they're doing. They've got a pretty sizable team of people that do retirement policy. So maybe a little bit you know what is the role of GAO in the Washington sphere.
Speaker 1:And you know, and also a big report that came out today with two you know not uncontroversial recommendations to the Department of Labor on target date funds. So they're, you know they're, they always have. They often have active engagements. Yes, I mean GAO, for the purposes of most of your listeners, is the research Investigative Arm of Congress and it takes requests from typically ranking members or committee chairmen on the Hill and it's a client. I think the thing to understand is it is a client-type relationship with the Hill, not a customer-type relationship, and so those requests go through back and forth. It's an iterative process to make sure there are questions that the agency can answer with the approach that it uses to what it calls audits. There are some just straight performance audits that the agency does some accounting things, but mostly it's public policy research and one thing you will see in these reports is that they'll always set up a criteria, sort of the way things ought to be, as defined typically in statute, and then whether there's a disconnect between the reality of how things are working and what that criteria is, and then recommendations to close that gap so that hopefully in the future reality matches better with criteria.
Speaker 1:Some of the stuff in the retirement space is maybe even a little bit more abstract. I did work on what are the philosophies of different ideas for discounting pension funds, but some of that stuff becomes very concrete what happens when you align the cost accounting standards that DOD contractors use to discount their pension funds with the specifications in PPA, and what does that mean for forward pricing. So I mean, you know there's there's there's sort of a range, a range of things. But yeah, I mean I think you know and I guess I should. I should also say it's a, you know, it's a nonpartisan, independent agency that I think is quite well respected on the Hill, and so I think it's probably always good to be, to be helpful.
Speaker 3:They take some pretty deep dives on stuff. You mentioned the report today about target day funds and and yeah, I mean there has been some, a lot of it coming out of some articles in the media. You know questioning, you know some of the fees and strategies associated with tdfs and so some um, some folks on the um I think it was bobby scott actually um submitted some questions um regarding target defense at jail and they just came out with that study, which, um you might yeah, he was.
Speaker 1:he was one of the requesters on that job and I'm trying to. I don't know if it was a joint request with the Senate side or not, I can't remember.
Speaker 3:I don't recall that either. So most of the listeners are very familiar. I mean Morningstar household name, certainly a well-known name in the context of in the financial services universe. But what they don't realize is how involved Morningstar is in public policymaking and research and, you know, to some degree in advocacy. So let's talk a little bit about all the things that Morningstar is doing in terms of positioning itself to be a significant contributor into the policymaking process.
Speaker 1:Yeah, so well. First of all, I really appreciate you framing it that way and that's certainly how we think about it. I want to preface this by saying I am just extraordinarily fortunate to work at a company like Morningstar that is willing to pursue this kind of strategy and willing to pursue it over the long term fell into this job, which is what happened. I joined a startup, we were acquired and at the same time, there were a lot of questions about how Morningstar, which was growing quite rapidly, moving into being a much more regulated business, how we're going to do government affairs, and we really didn't have a lot of internal disagreement around what our approach would be. We knew we were getting a lot of incoming questions Like, for example, we're cited a bunch of times in that GAO report.
Speaker 1:It's a lot of our data. We're getting questions like that from the Hill from different regulators, and so we knew we wanted to formalize that a lot more, make sure that we were coming to perspectives that represented the company's views and leveraged that data and that desire to advocate for ordinary investors to really put them front and center in the kind of analysis that we were doing. I think we announced our presence way back in 2015-16, when we did our first big analysis of what was then a much more controversial DOL fiduciary package. Let's call that one 2.0, maybe 1.0. We did the 2020.
Speaker 3:BTO as 2.0.
Speaker 1:It really was 2.0, maybe 1.0. We did the 2020 BTO as 2.0.
Speaker 3:It really was 2.0. Because it was the 2010.
Speaker 1:FDL, so maybe we're on 4.0 in any case.
Speaker 1:So they did a very large regulatory impact analysis and what we did in that case was try to replicate it and also change some of the assumptions around and sort of see what we got.
Speaker 1:And we found stuff that I think was reasonably annoying to people on kind of both sides of the debate, which signaled to me we were on the right track because we found a pretty sharp discontinuity over time where a lot of the associations with different kinds of conflicted business arrangements were becoming less and less important. But we still found a pretty significant effect of certain kinds of conflicts that we were able to measure. So you know we reported on that, we published some stuff in the Journal of Retirement, we use that to inform future comment letters to the department and also commentary on Reg BI and we've had, you know, we do track whether the agencies take our recommendations and I mean obviously they don't always listen to us, but I think you know we're trying to provide something valuable, empirically driven and truly driven by where the the data goes, as long as as we believe it will help um investors I mean that doesn't mean that we don't play the kind of um you know defense that every, every firm is is going to play from time to time.
Speaker 1:But but investors really are the the north star, and I'm not saying that's not true for anybody else. I can only speak for for us and um you know, we're just, we're just privileged to sit on the sort of data and capabilities where we can do some pretty interesting and valuable analyses from the point of view of policymakers.
Speaker 3:Well, I mean, you know, at your core you're a technology data company, right, and so you know it kind of makes sense, given that data, that data perspective, to be able to provide, you know, that kind of input into the policymaking process, which is oftentimes very short on. You know, empirical information when people are making policy decisions. I think is what you know, how regulators and folks on the Hill see the value in being able to. Well, you know, this is what. What's really, you know, happening here. How do you I mean how do you go about deciding? Is there some sort of internal process where you guys are going about deciding? What are the issues that we want to get in? You know, get involved with and get active in. You know how active in how do we go about deciding. If you're going to take a position on something, how's that process work?
Speaker 1:Yeah, it probably works pretty similarly to other places, again with the different valence that I was describing. I mean, we have an internal governance process. We have a policy council which I chair but which we really try to make sure that we're making decisions through consensus, and you know, one of our in addition to you know, putting investors first one of our guiding principles is do we have anything unique to add to this conversation, right? So I'm pretty reluctant. Having worked in government, I am painfully aware that there are human beings who have to read these letters that come in, right? So we're not just trying to kind of do a 20-page letter that's the same as somebody else's. If we think that we are well within the industry consensus, we may send a short letter explaining why. But if we don't have data to add to it, we're not going to just kind of there's plenty of other people making the argument but where we think we have something unique to contribute and it's important, you know that's where we try to focus.
Speaker 3:Well, speaking of data, and something where you clearly made an impact and obviously the hot topic of the day in our little world of 401k plans and financial services is DOL's retirement security regulation, aka affectionately known as the fiduciary rule. You know they issued their final rule last week Morningstar our count was 41 times. Morningstar was mentioned in that package of regulations and private transaction exemptions. That's way more than anybody else. I'm not even close in terms of impact and a lot of it was data driven, as you were suggesting. A lot of it was, you know, citing facts around how this would impact investors, how it would affect plans. Quite a bit about that. So talk a little bit about how you. You know that rule is very controversial. That rule is very controversial. One can argue. You guys sort of to some degree, represent everyone in the industry, in a sense that there aren't that many facets of the financial services industry that aren't your customers to one degree or another. So talk to us about that process. How did you decide to get involved? And then what did you kind?
Speaker 1:of focus on in terms of the comments and information that you provided to the department. Yeah, so we knew we would be. That's when we knew, you know, a priori, that we were going to be doing significant amounts of work on the analysis of the rule because we believed that the previous the PT-2020-02, the previous package and, of course, reg BI you know separate but related issue all have had a significant impacts on investors, and, I think, largely for the better. You know, for example, if you just look at where the money is going pre and post 2016,. Naive analysis we do more sophisticated econometric analyses as well, but that seems to have really accelerated a push into just higher quality, lower fee investments, and so we knew we were going to weigh in on this. It's part of our mission. The people running that team are very supportive and we know that not all of our clients are going to agree with our opinions, just as we wouldn't agree with all of their opinions. I mean, that's fine and I think that we have to be kind of guided by what we see and what our analysis shows. We have this Form 5500 database and I know this is a sophisticated audience, but that's the annual reports that plans file at least ERISA-covered plans file, and it involves some pretty labor-intensive and computationally intensive work to pull investment information off. The Schedule H, which is again where the Schedule of Assets is, is listed and it's not terribly structured and that's a whole other conversation. So we're sort of sitting on this data that can be very useful in informing this view and we had a pretty good idea of what we were going to do before we even saw the rule and when we saw the rule we refined our approach there.
Speaker 1:But the question here is around how much better could things plausibly get for retirement investors? And I think the answer for people covered by larger plans is it can't get any better. It is better to be an investor in the US in a retirement plan, basically anywhere else in the world, and it's better today than it was five years ago. And there is a point at which when you're paying like eight basis points for exposure to the entire domestic and international market, I mean it can't get that much better than that, really right. So we didn't think we'd see much there and we didn't see much there. We do see.
Speaker 1:We knew we were seeing beforehand because we do this annual retirement plan landscape report a lot of variation in the small plan markets. You get a lot of small plans that are doing a great job and then you have a lot that frankly aren't, and you could see that they're invested in the same stuff basically. So this sort of extremely wide variation in fees is troubling, and so we were able to produce an analysis that, I think, is. We made sort of small C conservative assumptions all the way. We didn't assume that the small plans would all of a sudden become like the best small plans. We just assumed they would get a little bit better, get a little bit closer to the median, and that has pretty significant savings for the 10% or so of workers who are in them.
Speaker 1:It's something that I felt got lost a lot in the debate and that we wanted to do. We also did a fairly limited analysis looking at the interest rate spreads on fixed index annuities, which we assume will come down, will narrow, given the scrutiny that would be put on them and given again the variation we see there in the marketplace. But I think the larger cost savings came from relatively small improvements to a large number of plans covering a fairly small portion of the 401k population, but that's still millions and millions of people, especially because people cycle in and out of small plans. So it's not like I think there's a tendency to stylize this, as people work where they work and then they'll just work there for 30 years, and obviously that's not true. So when you have a segment of the K marketplace where I think there's still some room for improvement that could benefit from this rule, we wanted to highlight that and, yeah, we think it's a big part of our mission. I'm sorry.
Speaker 3:I mean, obviously, when you do these kind of economic analysis, there's, you know, assumptions that are fundamentally, you know, critical to you know, doing that analysis, you know what we saw. If you go back to the mid-90s, when you know there started to be recognition that there was, you know, a fiduciary requirement associated with 401k investments. And you know this is, you know, going back to the you know, early 90s. It was really just the beginning of the 401k, you know, becoming the primary retirement plan in the workplace, 401k, you know, becoming the primary retirement plan in the workplace. And then, you know, you march forward to the early 2000s when you start seeing litigation in this area and the fiduciary process became, you know, pretty much understood as necessary.
Speaker 3:And so I think to your point, you've seen over time, for better or worse, a reduction in investment management fees that has been concomitant with that process. So what you're doing is saying, okay, we saw how that worked with large plans. If you interpose a fiduciary requirement in the small plan market, which this regulation would do, you're making some assumption You're not going to get all the way to matching large plans but you're going to get marginally better. I think that's a fair assumption, that you're going to get marginally better investment management fees.
Speaker 1:Yep, that is a great summary of what we did, and then we have pages and pages and pages explaining how we did it and what the specific numbers are and where they were derived from. We actually also only assume that around 30% of plans will make any adjustment, because a lot of the small plans do look pretty good, which?
Speaker 3:I think is, and your point is well taken there has been improvements in the marketplace, a lot of it being a lot more folks getting into that marketplace that are tech. You know a lot of, arguably, fintech companies that are offering, you know, online types of 401k programs where their, you know their pricing has gotten more competitive and notwithstanding the fact that you know there are policymakers and there was an article in the New York Times recently that all small plans are just, you know, grossly overpriced, and I think we both know- that, yeah, you don't see that in the data at all.
Speaker 1:And again, that's the troubling thing. If they were all expensive, I would just say, well, that's just the economies of scale, that's just the marketplace. But when you see such a wide variation I'm using my hands, like this is not a visual medium, but you know such a wide variation that's where you know we think, okay, there is some room for improvement there. Sure that you know that that standard deviation?
Speaker 3:well, it should be correct, because if it's so wide, then there's a. You know your economic background would suggest there's got to be a fault in the marketplace and the way it's operating. So and that's. You know, that's where, in general, that's where regulatory activity is intended to address it. So we haven't talked about rollovers Big deal. Right, you know I've made the argument that the plan advice issue is, you know, is controversial, but really marginally controversial compared to the rollover side of the universe, and so you provided some input on that. Can we talk about that a little bit?
Speaker 1:Sure, yeah, I mean we believe that having the kind of documentation of the reason for a rollover is extraordinarily valuable for end investors. That would be required by this rule for more entities. We advocated for that in Reg BI. It is not an explicit part of it, although the sort of preamble talks about how you would comply doing this. But then you know some firms do, some firms don't, and there are some FINRA rules around it.
Speaker 3:But your point is well taken. It's not explicit. It's not't and there are some FINRA rules around it. But your point is well taken. It's not explicit.
Speaker 1:It's not explicit and that's the biggest change, I think, certainly for entities that were already covered by and following Reg BI the sort of explicit requirements around documenting substantiating the reason that a rollover is in a client's best interest. I think, if nothing else, that helps set expectations for the person who is rolling over. Rollovers aren't going to go away. There are a lot of DC plans and DC plan sponsors let's be honest who don't really want those assets there post-retirement.
Speaker 1:I mean there are some who do. There are some who have wonderful programs that are designed to allow people to convert that money into lifetime income in plan, but you also have plans that don't even have good ways of doing structured withdrawals right. So the rollovers are a necessary part of this system. In fact, this whole system is a giant public-private partnership and we do look at the regulation like that and regulation that's going to be effective is going to encourage continued partnership that way. But yeah, we've supported this for a long time and we think again.
Speaker 1:Things are definitely quite different and better when you're talking about, certainly, where the assets are flowing in mutual funds, and that's just a fact. You can just look at what the weighted expense ratios are today compared to 10 years ago. It's a phenomenal time to be an investor and I'll say pooled investment vehicles so you can cover all the CITs and everything and nobody feels left out. There's some really good insurance products out there. There's some less good ones. We do not buy the argument that the NAIC model standard is the same or covers things in the same way, and we think that imposing at least a requirement to justify the rollover will be very helpful for investors thinking about this extraordinarily important decision when they attain retirement age or when they terminate from employment and are thinking about what to do with that money.
Speaker 3:So you mentioned lifetime income and obviously the insurance industry is upset. And obviously the insurance industry, you know, is upset that's probably the most grossly understated word associated with their view of the DOL rule but is, you know, very concerned with the rule. One of the key components is, they believe it will reduce access to advisors to enable participants who want lifetime income solutions to obtain them. What was your guys' analysis of that?
Speaker 1:I mean, it's a very hard thing to falsify, which is why you see those kind of arguments pop up, sort of the unintended consequence argument is it's always easy to create one. But basically, I believe in the sort of not to be flippant, but I believe in that financial services firms are highly innovative. You heard a lot of those arguments back in 2015 and 2016. And, yeah, that rule was vacated, sure, but you saw a lot of changes, a lot of really innovative and positive changes in response to that rule before it was vacated and, by the way, that's why Reg BI was so successful. You just introduced Reg BI without all that background noise. I don't think anything happened.
Speaker 1:Because it had already happened, but the path of least resistance was to just keep doing what you were doing, everything's iterative.
Speaker 1:Everything's iterative, now I recognize this is a significant shift. Everything's iterative, now I recognize this is a significant shift. But the insurance industry clearly has an important role to play in helping people, particularly those for whom social security is not going to be a substantial income replacement and who don't have so much money they can effectively self-insure for longevity risk. That's a pretty big slice of people actually, something we're working on trying to quantify how many households fall into that category. I mean, there's people who just have so much money they might as well yeah, they're going to be fine, right. Their functional withdrawal rates are well under 2%, 3%, and that's fine, right.
Speaker 1:And then you've got people for whom Social Security is a significant portion of the replacement and they probably don't need additional lifetime income, although their results may vary and mileage may vary and everybody's situation is different. But there's a slice of American households that can benefit from these products and I think what you'll probably see assuming the rule isn't ultimately thrown out by the courts is significant amounts of innovation in that space. And again, I mean I just keep coming back to well, if you can't justify why the rollover makes sense, I don't know. That seems like a very reasonable barrier given the fiduciary protections that people enjoy inside their plan and the massive consequences of these kinds of rollovers. So that's Trevor Burrus Jr.
Speaker 3:Yeah, I mean ironically it's probably the annuity rollover is probably the most justifiable rollover out of a plan because so few plans provide any type of guaranteed income solution. So I've always felt that in a way it's easier to defend the annuity rollover because of the fact that there are a lot of employees and participants who actually to your point, middle income individuals who would really benefit for a you know all or a portion of their account convert into lifetime income. I think the second so I'm not that doesn't necessarily trouble me and I've been surprised at the pushback on that because I think to some degree it favors insurance versus other types of investment vehicles. I think the challenge for the insurance industry is on differential compensation. It's just incredibly uncomfortable with the notion of fee disclosure in any way. It's sort of a cultural barrier that exists in that universe.
Speaker 1:Let me sort of dig in on two things in that universe. But let me sort of dig in on two things. One is one of the things we said in our comment letter and we didn't expect to see this in the final regulation for obvious reasons be clear in a second. But we said you know, really you should always be thinking about social security and that should be part of the analysis and the department did mention that in the preamble.
Speaker 3:They did, they did Made me feel happy.
Speaker 1:You know that's good, so that's good.
Speaker 3:It's better than nothing. They said you should think about this, but we're not going to say that you have to.
Speaker 1:That's right. But I mean, I think, and I do think, that the sort of you want to make sure that the incentives are set up for advisors, producers, whoever is giving that recommendation to think about, because social security is a pretty good deal. Even if you think that the benefits are going to be cut down to 76% or whatever in 10 years is still a pretty good deal and I don't think.
Speaker 3:For lower-moderate income workers it is a great deal.
Speaker 1:And I just that's not what you asked and I won't get sidetracked.
Speaker 3:Well, it's a good segue because it's going to go to something else.
Speaker 1:I was just going to say, though, on that point right, about insurance industry. I mean, a counter-argument here might be and if I were I'm not speaking for them and I can't know what's in sort of the leadership of these companies like what they think, but if I were in their shoes, I would not be able to publicly say, ah, this is great, right, because I had a lot of producers who were upset, but if I had wanted to shift to a different business model? We definitely saw this in 2015, 2016, 2017. I now have a super useful boogeyman that I can point to. It's not me, man, right, it's the mean department of labor, and I do think there is some.
Speaker 1:I think the firms that look at this as an opportunity assuming that it is not vacated are going to be able to do some really interesting and exciting things in terms of serving retirement investors. I know it's easy for me to say that, it's easy for me to have that optimism. I don't have to implement it, but I really do think we've seen this movie before in other industries and and there's a tremendous amount of opportunity there um, because you don't have the first mover problem, where someone jumps into the pool and nobody else is. Is there everybody's being forced?
Speaker 1:in and so that's a terrible metaphor, but you see what I'm saying.
Speaker 3:I mean. I mean that regulation creates that opportunity set of funds to my IRA, set of funds that are, you know, not going to be as priced as well. There's no way it's going to be. To your point, you know the fact that I'm giving, you know, a little bit more of a handholding with the participant. Is that going to be enough to justify the rollover if they're paying 50 basis points more, Whereas if I'm rolling over part of the account into an annuity product, that is not, again to your point, the retirement plan isn't offering, they really don't offer any way to do installment payments out of the plan in a practical and reasonable way. I can justify that all day long. There's nothing in the rule that says you can't pay a commission. I think the trick's going to be levelizing those commission-based right and that and and that, that.
Speaker 1:That looks an awful lot, like you know listeners will remember. You know triple zeros and t-shares and all. I mean there are things that can be done but they can't be done in the absence of regulation and I mean there's just no way to sort of push that through. So anyway, yes, I think I, and I think your point is very well taken around. Yeah, I mean what the department would call differential products.
Speaker 3:I think, arguably, this is actually pro-annuity from a rollout perspective because of that. Anyway, so you mentioned Social Security, let me let me talk about something completely different, and that's, you know, there's been these attacks on 401ks that are, you know, kind of been pervasive for several months now in the media in various forms. One of the things that has frustrated me is the fact that when they, either the media and some of these academics look at now I'm talking with my hands look at the 401k system, they look at it in isolation and they completely ignore the role that social security plays. They're not and were never intended to be. You know, uh, completely, uh, separate rather, part of the 401k is a supplemental savings program on top of whether it was a, you know, traditional defined benefit plan or fundamental social security, which is a universal retirement plan for all American workers.
Speaker 3:Why do you think that is the case and how? How can? Because if you look at the replacement ratios income replacement ratios for social security alone, they do a fantastic. It does a fantastic job for lower and moderate income workers. It's the middle income, and you mentioned the wealthy people. They'll be fine, we're not worried about them. It's the people in the middle that desperately need that supplemental savings if they're going to get to that magical 70 whatever percent of income in retirement.
Speaker 1:I think there are a few reasons that you've had this. Well, I mean. So the question is, why do people just ignore social security and its progressivity? I don't have a pithy answer. I mean, I think why do people tend to focus on, you know, the tax deferrals over the next 10 years? Well, that's because that's how JCT scores them and that's because of budget rules, right? So I think that's, you know, that's just unfortunate. Why do you know, why do people sort of miss that these are deferrals?
Speaker 3:But the attack on the 401k is about the 401k. It talks about the fact that the arguments are the 401k doesn't help lower income people, and the point is well, of course it doesn't, because it's asking people who don't have enough money to take more money out of their paycheck and put it into a supplemental savings plan. It's never going to work well for people that are at the lowest income levels.
Speaker 1:But that's why we have Social Security. Well, I think the other thing is that people who are not living and breathing this every day just miss the tradeoffs that are intrinsic in a voluntary system voluntary for employers, much less voluntary for the workers. And so, to the extent that we don't have a mandate and we have a voluntary system, you're going to need to have tax benefits that incentivize companies to offer these right, and I think that's easy to miss if you're not an individual. One of the things people always ask me is why can't the IRAs just have the same limits as Ks? And the answer is well, then there would be no more Ks.
Speaker 3:I mean not no more, but you would use.
Speaker 1:There would be many fewer right, there'd be no reason for the principles. And then I think things like ADP testing is pretty People's eyes glaze over. But things like, you know, adp testing is pretty people's eyes glaze over, but we do have a lot of, you know, safeguards and protections in the system. One thing that has really frustrated me now that I'm kind of going off about this is we have current law that was passed recently in a bipartisan way in the form of the Savers match. That is going to be enormously beneficial for, at least for people lucky enough to have coverage at work and that you know. But but fairly low income people just to approaching, you know, the lower end of moderate income and we've done some some preliminary modeling on this.
Speaker 1:It may be out by the time folks are listening to this. It's going to come out the week of hope, the week of May 8th or 9th, and you see enormous benefits, even if you don't assume that anyone changes their behavior at all, which is probably not right. And if people do change their behavior they say oh, I'm getting a government match in addition to my employer match. I'm going to contribute up to make sure I get that full $1,000 government match. You would have really significant differences, as measured by the ratio of account balance to final projected salary, which I think is sort of just the easiest way to make comparisons across disparate income groups.
Speaker 1:And so that stuff's really important and is worth highlighting and it's worth defending, because this stuff's going to be difficult to implement and you know, I certainly appreciate that it's going to be challenging to implement and you know I really want to see that happen. But yeah, I mean, we don't have a 401k system, we have a retirement system, we have an incredibly strong pillar one. And yeah, I guess the other thing is there's sort of when I talk to people my age, so in their middle age, people just assume they won't get any social security and I think that may contribute to some of this and I just think that's the wrong assumption. That's just a math problem. It's a fairly easy math problem to solve.
Speaker 3:Yeah, I mean I have a lot of confidence we'll solve it. I mean, one of the things that we're thinking about from an organizational standpoint and it's a little. You know, we got to wait past this election because no one's going to, no one's going to talk seriously about something as controversial as social security or fixing social security until after that. But the reality is it's not. You know, people have this tendency they want to talk about well, we're going to do this fix or do that fix. We're going to, you know, just the retirement age. We're going to increase taxes and we'll lift the wage, but that's, I mean, this isn't difficult.
Speaker 3:The difficult part is both sides agreeing to put down their swords and recognize they have to fix it and are willing to not snipe at each other during the process. That's what we got to do, like we did in 1983, which is the last time we quote fix Social Security. So that's the challenge is an agreement on a process that will not be contentious, so that we can sit down and do the math, because, as you point out, it's a defined benefit plan and it's not nuclear physics, right? So you guys are also doing something, in addition to all the work that you're doing from a policymaking standpoint? You partnered with Aspen and Dacia on the collaborative for equitable retirement savings and you came out with your first study. We don't have a lot of time left, but kind of quickly. What were the takeaways from that work?
Speaker 1:Yeah, let me preface this by saying and I'll try to do this quickly, but I'm just so excited about this work. Really, the only data we had was from the In Living Color study, which Ariel did 10 years ago, which is a great study on the sort of race and gender gaps within K-plans. We really wanted to do something new and that study largely goes back to around the time PPA was being implemented, so there's big differences in terms of auto-enrollment. It's really important to kind of get at this and I think people say well, you can go and you can see this stuff in the Survey of Consumer Finances, but really really small sample sizes there when you get to certain race and gender combinations, so it's sort of difficult to take that too seriously. And then we don't know anything about the plans that people are participating in. So we really need administrative plan data.
Speaker 1:So I'll give you just the bullet points of the findings. The first thing is we do have a problem here. Among people lucky enough to be covered, we do have pretty significant race and gender disparities, but they're not just driven by income. I think a lot of people would assume. Well, once you control for income, that'll narrow. They're not just driven by income. At least some of the problems seem to be exogenous to that or separate from that.
Speaker 3:But it seemed like just to quickly interject, if you don't mind. It seemed like a lot of that was hardship.
Speaker 1:Yeah, I was about to build up to that. I got a whole no, no, no, you got to the punchline, which is important. I mean, that's the thing. That's exciting is pre-retirement withdrawals. So black and Hispanic workers just have much higher frequencies of pre-retirement withdrawals and that appears to have a really large effect on overall accumulation. And while that is discouraging in some ways, it's very exciting because that is a problem that you can solve.
Speaker 1:It's identifiable, it's identifiable and it's something that it's pretty easy, and I think some of the sponsors we're working with will try different things out. I mean, maybe it's having some kind of point of paycheck emergency savings, or maybe it's just raising the barriers a little bit on the hardship withdrawal so that it's not quite as easy to do. There's a lot of ways that you can get at that.
Speaker 3:I thought it was also interesting it wasn't just communities of color, but it was also gender.
Speaker 1:Yeah, the gender gaps and I will commend people to go to the seafirstorg website and download the summary piece or even the full report but, yeah, the differences across gender are quite stark.
Speaker 3:And you can probably imagine dealing with daily life responsibilities for women in those communities might, in terms of child raising and other factors could lead to that increased withdrawal rate.
Speaker 1:Yeah, and I certainly don't want it to come across like we're blaming anybody or that some of these withdrawals could, that all of these withdrawals could be avoided. But we do think some of them probably could and we even have. We need more data but we do think that there's probably some benefits that could come from different kinds of interventions that some of the sponsors we're working with are kicking around, and that would be very exciting. I mean, this is really just phase one, but you can't solve from different kinds of interventions that some of the sponsors we're working with are kicking around, and that would be very exciting. I mean, this is really just phase one, but you can't solve a problem until you can identify what's driving it.
Speaker 3:And I think we've made an important contribution in looking at what's driving some of these gaps and I think it's a great start to an incredibly important conversation. That really I mean. Admittedly, we've, as you know my organization have focused appropriately so on coverage and that needs to continue. We've got to continue to try to close the coverage gap. The driver, in terms of of helping workers have enough retirement is critical In addition to automatic enrollment, is addressing the leakage issue in a in a in a substantive and significant way.
Speaker 1:That's right, yeah, that's right yeah.
Speaker 3:If we can solve and get better control of leakage. I think the numbers I've seen in various work that some people have done dramatic increases in people's retirement accumulations.
Speaker 1:Well, yeah, just in our paper I mean we see a real closing of the gap Again between that preferred metric that we have for this paper of the ratio of the account balance to final salary, have for this paper of the ratio of the account balance to final salary. I mean it is a dramatic jump up for the groups that are currently most likely to take hardship withdrawals. If you somehow were able to cut that off Now. Again, I think you do need to have some ability, even in an auto-enrollment world, to take some of this money out to encourage savings, and there are going to be times where that is the right decision. But I think it's generally not a good decision and generally could be hopefully avoided with some other kinds of interventions.
Speaker 3:Great, well, listen, aaron, really appreciate your time. Lots of really good, I would say geeky stuff that we went over, but that's what we love to talk about, right?
Speaker 1:Yeah, no one's ever accused me of not being geeky, so same here, I'm afraid.
Speaker 3:So listen, thanks. I hope we can do this again at some point. There's a lot going on in our world and it's not going to stop anytime soon.
Speaker 1:Oh, this is really fun. Thanks for having me on the podcast. Thank you.