US Defined Contribution Plans Need to Cover More Workers, Says TIAA

Workplace retirement plans have a lot of money: Defined contribution assets in the U.S. stood at $11.1 trillion at the end of the year’s first quarter, up 5.3% percent from year-end 2023, per the Investment Company Institute.

Still, according to a retirement security study by the TIAA Institute, the research arm of TIAA, the U.S. retirement system is spotty for workers. The reason: There is no universal enrollment in employer-provided plans, as is often the case elsewhere.

Globally, the average retiree will spend roughly two decades in retirement, double the tenure from 50 years ago. In the U.S., since Social Security began 90 years ago, life expectancy has risen 17 years.

“In our vision for the future, all U.S. workers are automatically enrolled into a robust, cost-efficient retirement plan,” commented Bret Hester, general counsel and head of TIAA’s government relations and public policy group, in the report. “Workers who don’t choose their own investments would be defaulted into a well-designed investment solution that can easily be converted into a guaranteed income stream or other payout option at retirement.”

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In the U.S., defined contributions plans are now predominant in the private sector, although participation is not often mandatory and not all include employer matching contributions. “Because DC plans do not automatically convert retirement savings into a guaranteed income stream, and most participants do not voluntarily purchase annuities, the only source of guaranteed lifetime income for most retirees is now Social Security,” the report noted.

Meanwhile, the number of retired Americans is larger than a half-century ago, and so is the time spent in retirement, as longevity has risen. In 1974, when the Employee Retirement Income Security Act, or ERISA, was enacted, the average male worker retired at 68.5 and had 9.6 years in retirement. In 2024, the average worker retires at age 65.2 and spends 18 years in retirement.

The study covered Australia, Canada, the Netherlands, Singapore, Sweden, the U.K and the U.S. The U.S., the U.K., Canada and Australia have individual choice systems for workplace retirement plans, in which participants manage their own investments and risks, including longevity risk, which means some may opt not to participate in their employer’s plan, if one is offered.

The Netherlands, Singapore and Sweden have collectively managed plans, in which employers require workers to participate, limit individual choice and share risk across all participants. All have a supplement in government-run, compulsory plans, such as Social Security in the U.S.

In the U.S., strong laws ensure transparency in 401(k) plans and the like. The report highlighted this, evidently to underscore that these were trustworthy products.

Some 54% of workers have access to employer-sponsored plans. “Policymakers have already made efforts to expand retirement plan coverage, although a federal mandate for employers to offer a plan has yet to gain approval,” the study pointed out.

But the lack of required participation has a downside. As the report stated, “the low rate of annuitization at retirement implies that many participants are missing out on risk sharing that could potentially boost their income in retirement.”

The report warned that the “voluntary, employer-centric nature of the workplace system also leads to variation in the quality of workplace retirement plans.”