Lessons for U.S. retirement systems: Insights from global practices

The U.S. retirement system faces significant challenges in ensuring adequate retirement savings for its participants. As the U.S. grapples with these challenges, valuable lessons can be drawn from other countries' pension systems.

A recent study by the TIAA Institute, titled "The future of retirement security," analyzed seven countries, categorized into "individual choice" (IC) systems (Australia, Canada, United Kingdom, U.S.) and "collective choice" (CC) systems (Netherlands, Singapore, Sweden). The IC countries - Australia, Canada, United Kingdom and United States - focus heavily on individual responsibility and personal choice in retirement planning. In contrast, the CC countries - Netherlands, Singapore and Sweden - emphasize collective risk-sharing and limit individual choice to ensure broader, more equitable retirement outcomes.

Against a backdrop of increasing lifespans and the decline of traditional defined benefit (DB) plans and growth of defined contribution (DC) plans, here we explore the study's insights and provide actionable recommendations for U.S. plan sponsors seeking to improve participant outcomes.

Success of auto-enrollment

One of the most significant findings from TIAA is the success of auto-enrollment in increasing participation rates. In countries like New Zealand and the U.K., auto-enrollment has led to high participation rates, with opt-out rates remaining low. Australia has a mandate whereby participants cannot opt-out. This has been instrumental in encouraging retirement savings among workers who might otherwise neglect it. In the U.K., the success of auto-enrollment and master trusts has doubled coverage rates among private-sector employees without imposing a heavy burden on employers.¹ This model has helped ensure that more workers are saving for retirement, leading to better financial security in the long term.

Auto-enrollment addresses a key behavioral challenge: many employees want to save for retirement but are overwhelmed by the choices and decisions required to enroll. Automatic enrollment effectively addresses decision paralysis by making saving the default option, significantly boosting participation rates. In fact, studies have shown that automatic features like auto-enrollment and auto-escalation can increase retirement savings by up to 70 basis points.² Moreover, the Pension Protection Act of 2006 and the original SECURE Act of 2019 and the SECURE 2.0 Act of 2022 have further encouraged the adoption of automation by providing safe harbor provisions and tax credits for plans that implement these features.

The future of global retirement: A comparative analysis of global pension systems

• Countries around the world are considering and implementing reforms to their retirement systems due to increasing demographic and economic pressures. A key driver of these reforms is human longevity. For example, the average retiree today can expect to spend about two decades in retirement, roughly double the time from 50 years ago. In the U.S., life expectancy has risen by 17 years since the Social Security program debuted nearly 90 years ago.
• As part of this demographic megatrend, fewer workers have access to DB plans, which are centered around a consistent income stream in retirement. Instead, many save for retirement through DC plans, which do not automatically convert into retirement income. Many of the reforms observed worldwide currently revolve around adapting to improve participant outcomes.
• The TIAA Institute studied the experiences of seven countries, developing a framework for understanding how various factors affect different retirement systems. The goal was to identify the best ideas from these countries and use them to develop an actionable template for a well-designed retirement system of the future.

Optimizing retirement savings accumulation

Two key factors are vital for optimizing retirement savings: maximizing inflows through contributions and employer matches and investing savings in a manner suited to each worker's needs. The Netherlands is often quoted as an example of a country with a high income replacement rate. What is less often mentioned is that it also has a very high total contribution rate to retirement savings - 37% including employer contributions. There is no way around it: those countries with higher replacement rates in retirement have higher contribution rates during their working careers.

Auto-enrollment is not just about getting employees into the plan; it also involves ensuring that contributions are sufficient. New legislation in the U.S. mandates initial auto contributions of at least 3%, with automatic escalation up to 10% - 15%.³ Plan sponsors must balance the need to boost retirement savings with the risk of participants opting out if the auto contribution rates are perceived as too high.

Balancing choice and guidance

While choice is generally viewed positively, too much choice can be counterproductive. Many individuals, due to inertia or lack of confidence, fall back on default options. This makes the quality of these default options crucial.

Plan sponsors can benefit from focusing on providing high-quality default options and simplifying investment choices. Singapore's financial literacy test, for example, provides flexibility while ensuring that participants are well-informed about their investment choices if they choose to self-manage their investments. Offering clear guidance and support can help participants make informed decisions without feeling overwhelmed by too many choices. Furthermore, the countries with high annuitization rates offer participants income as a first choice and give some options regarding timing or type of income. Updating U.S. platforms and interfaces to allow an income as the first option at retirement can help participants focus on long-term financial security.

Transition to hybrid plans

Globally, there is a shift toward hybrid solutions combining elements of DC and DB systems. Policymakers in the U.S., Australia, Canada and the U.K. are introducing more mandates and promoting lifetime income, while those in the Netherlands, Sweden and Singapore are allowing participants more individual choices.

In the U.S., the decline of DB plans and the rise of DC plans has shifted the responsibility of retirement income planning to individuals. Sponsors should consider moving toward hybrid solutions that combine the flexibility of DC plans with the guaranteed income of DB plans to provide a predictable income stream in retirement.

Addressing income adequacy and longevity risk

The TIAA study underscores the need for lifetime income solutions to ensure financial security in retirement. Countries like the Netherlands or Sweden have pioneered models that provide lifetime income with variable levels, making it possible to temporarily adjust benefit payments if the system becomes unsustainable. This model offers an innovative approach to managing longevity risk and ensuring income adequacy.

Fortunately, many U.S. plan sponsors are considering offering lifetime income options and promoting annuitization. Developing frictionless pathways that include allocations to lifetime income will make it easier for participants to secure a stable income in retirement.

According to Nuveen's 2024 Global Institutional Investor Survey, "EQuilibrium," over half of respondents who oversee DC plans say guaranteed income solutions can improve retirement readiness. Enhanced account portability would make it simpler for participants to consolidate their savings, which in turn would make lifetime income options easier to implement, and perhaps further encourage adoption.

Summary of recommendations for U.S. plan sponsors

Implement auto-enrollment: Consider making auto-enrollment the default option to boost participation rates and encourage retirement savings from the outset.

Simplify investment choices: Offer high-quality default options and clear guidance to lower costs and help participants make informed decisions without feeling overwhelmed.

Encourage higher contributions: Highlight the benefits of employer matches and tax incentives to maximize inflows and boost retirement savings.

Offer lifetime income solutions: Develop and promote annuitization options to ensure stable income in retirement, combining guaranteed income with liquid assets for flexibility.

Indeed, the U.S. retirement system can significantly benefit from the experiences of other countries. By implementing auto-enrollment, simplifying investment choices, encouraging higher contributions and offering lifetime income solutions, plan sponsors can take practical steps to improve retirement outcomes for American workers.

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