On a recent trip to Norway, I discussed many contemporary world issues with relatives and acquaintances and was struck by the dichotomy between the US and Norway in terms of how each approaches their duty to make sure citizens have enough money to retire. Ok, not a big news flash, most know the US lags behind Norway in this particular area. Another reason it scores high on the “Best Places to Live” indexes.
In the US, the Revenue Act of 1978 included a provision that became IRC Sec. 401(k) under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as compensation. These new tax laws were designed so individuals have more control of their retirement savings and insure that, in addition to Social Security benefits (the long term funding of these benefits is viewed with great worry) and individual 401K plans, retirement needs would be met.
Company pension plans were long held as the extra amount needed to help employees retire and bridge the gap with SSI benefits. When the 401k plan was rolled out, companies breathed a sigh of relief — they no longer needed to hire experts to invest and manage corporate pension plans and invest the same amount in funding retirement for employees. Companies quickly rolled out 401k plans and matched contributions at various levels – still a savings from prior pension scenarios. Sounds great, but the logic behind the long-term viability of these accounts later became very apparent – it was flawed. Employees cannot be trusted to save and invest for retirement. Really. These are people I know and love. Hard working, inspired, family oriented individuals. We expect people to understand what to contribute, what INVESTMENTS to make to optimize their retirement return (the scariest concept for most Americans and one they eagerly pass off to an investment manager with less scrutiny than the person they hire to cut their grass in the summer). The majority of the American population has no idea how to invest their own money to hit a retirement age target of 60ish. The horror… the horror. Let’s layer on top the issue that most American’s don’t save, and if 401k funds are available to them individually, they withdraw money and pay a penalty for a number of reasons — emergencies to vacations – yikes.
So, we know CFO’s have fiduciary responsibility for corporate 401k plans. That’s already intimidating knowing that responsibility flows to them personally if the plans they administer have investment choices that aren’t benchmarked to well performing investments, the fees are too high, not remitting contributions timely enough and following reporting and disclosure requirements. Generally, protecting the best interests of the participants.
So, my point: should they also have stewardship responsibilities and make sure employees are offered top-notch EDUCATION on saving for retirement: tools to reach retirement goals, and, general encouragement to save, save, save and not borrow against or drain the assets in those plans.
Ok, back to Norway. The taxes in Norway are much higher – roughly 30% – and everyone pays them regardless of income thresholds. Taxes in the US are much lower for the general population, and 44% of individuals in the US don’t pay anything. Yikes, again. But Norwegians are guaranteed retirement income – around 60% of what they earned in their jobs. They are also guaranteed health care and college education support. These programs are funded by taxes, and maybe some sovereign wealth. They have no control of these funds other than their voting rights. So, no borrowing against them, draining the account and paying a tax penalty, or not saving at all. The Norwegian government carries the responsibility for making sure people retire based on the stewardship of tax funds. They’ve taken on the “big deal” investment strategies, not assuming everyone is responsible and sophisticated enough to do this on their own. And then their health care…another topic on social responsibility we’ll skirt here.
Now, the US is left with companies walking away from meaningful responsibility for helping people retire. Social Security is supplemental, at best – not even close to 60% of the working wages of most US citizens. BIG PROBLEM.
Should the CFO employ all tools possible to put retirement savings education on the front burner of any employee benefit strategy? Make sure these educational programs don’t downplay the importance of saving for retirement and make sure the company puts weight behind it? Advocate for corporate matching at the highest level possible and adjust vesting requirements to allow employees to vest in a shorter period of time in order to walk away with 401k benefits that are portable – actually has money in it? YES! Considering a large portion of the current workforce only stays one or two years at each job, how will they ever see traction with their account balances if they never vest.
Please consider elevating your CFO to steward, in addition to fiduciary, of your retirement benefit plan. We need to help supplement the government in taking care of employees – the very foundation of the companies we run in the US. Good for companies, employees, and the US.
“Experience breeds wisdom, and wisdom breeds vision – Dalai Lama XIV”