It’s Not Perfect—but the U.S. Retirement Evolution Remains a Model for the World

I would be the first to agree the U.S. retirement system is not perfect. More Americans need access to retirement plans and those who have plans, need to save more. There is no question improvements should be made. But that doesn’t mean we need to throw the baby out with the bath water.

Far too often, critics ignore the benefits of the current system. They instead point to losses during the financial crisis when equity values plunged; overlooking the fact that account values for the majority of those who have continued to contribute now exceed the highest balances prior to the market downturn[1].

Some critics argue the answer is to do away with defined contribution plans and go back to defined benefit pension plans—but that oversimplified and unrealistic answer ignores the fact that global competition puts great pressures on most employers today regardless of size. In this environment, defined benefit pension plans create financial obligations on employers that, for many, are just not sustainable.

The realistic answer is to enhance the existing defined contribution/401(k) system. The U.S. needs to:

  • Make it easier for employers to offer plans.
  • Expand automatic enrollment and use higher default contribution rates.
  • Incorporate automatic annual savings increases.
  • Increase use of the “stretched match,” which encourages participants to save at a higher level in order to get the full employer match.

The U.S. retirement industry knows these concepts can help increase savings in meaningful ways. And so do other countries.

I can tell you from my meetings with government officials in Asia and Latin America over the past 25 years, the 401(k)/ defined contribution system remains the primary model many governments are studying and seeking to emulate; in part to meet the retirement needs of aging populations and in part because of the link between long-term pensions assets and economic growth.

Most recently, the Principal Financial Group® contributed to a project with the highly respected Economics School of Peking University in China which was studying retirement systems around the globe as China considers enhancing its own pension system.

The resulting report validates key components of the U.S. private employer-sponsored system, especially tax deferred retirement savings. The study included recommendations for greater use of automatic savings features, more tax incentives and enhancing the employer-based structure.

The report also reflects the potential economic benefits on the growth of the capital markets and GDP in China.

In the U.S., the build-up of 401(k) plan assets played a key role in long term capital formation during the robust 1990’s, helping to boost GDP growth. Today U.S. retirement market assets have reached nearly $18 trillion[2], which represents approximately 80 percent of total U.S. GDP—one of the highest asset to GDP ratios in the world.

Chile, one of the fast growing economies in Latin America, owes part of its above average economic expansion to the private pension system. The steady flow of long term pension assets is credited with 19 percent of the growth of the country’s GDP during the first 21 years of the private mandatory system[3]. Since the beginning of the last decade, the mandatory system has been enhanced with new voluntary contributions favored by tax incentives. Today, pension funds represent nearly 61 percent[4]of Chile’s growing GDP[5].

The fact that other countries are drawing from what has worked in the United States is a tremendous validation of the defined contribution system in place today.

The U.S. must continue building on that system to produce even better outcomes for a greater number of people while preserving what is working, especially current tax incentives.

The U.S. retirement system needs evolution, not revolution. 

The world is watching.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

t13041903at – 4/2013


[1] EBRI, Jack VanDerhei.  As of March 31st, 2013, the majority of participants who continued contributing to the defined contribution plan had higher account balances than their account balances November 31st, 2007, just before the recession started.

[2] Cerulli’s 2012 US Retirement Market Update projected U.S. retirement assets at $17.7 trillion at the end of 2012.

[3] Internal estimation based on the results of the paper, “Macroecnomics Effects of Pension Reform in Chile”, Vittorio Corbo and  Klaus

Schmidt-Hebbel, April 2003.

[5] International Monetary Fund  World Economic Outlook Database, April 2013.

  • Charles Humphrey

    The only meaningful measurement of whether a retirement system is actually working is whether it produces income for retirees at and through retirement. If this is the case in the U.S., our system rightfully ought to be held up as a model for the World. But where is Mr. Zimpelman’s evidence for this? And simply inputing more money into the system, as he suggests, cannot be justified without more certainty about outcome (i.e., are the very expensive tax expenditures involved worth it in terms of the income that is realized for real people at retirement?). Putting more money into our current system, without more, will not solve the problem of retirement income.

    • Larry Zimpleman, chairman, president and chief executive officer, the Principal Financial Group

      Thanks for your comment. I agree the focus does need to be on outcomes. That is why we are working so hard to encourage automatic savings at higher levels to improve the chances for a higher income replacement ratio at retirement. Our research has shown the most important variable in achieving an adequate retirement income is saving at high enough levels.

      We will see the evidence of the current system’s ability to produce retirement income when today’s 40 year olds retire. They are the first generation to have a full career with 401(k) plans.

      But research shows 401(k)s are on track to replace as much if not more than the traditional defined benefit pension system. A joint study by ICI and EBRI projects more than 60 percent of today’s 401(k) participants in their late 30s to mid-40s (who will turn 65 between 2030 and 2039) will accumulate enough in their 401(k) accounts to replace more than half their salary[1]. A survey[2] by Brightwork Partners says those participating in an employer-sponsored retirement plan are on track to replace 79 percent of income while those not in a plan will replace only 41 percent of their income.

      Is that enough to justify the tax advantages? Absolutely, especially since the tax advantages are key to incenting the savings in the first place and when they are viewed in the proper context.

      Retirement plan tax incentives have been mischaracterized[3] as expenditures when they are actually revenue-producers. The federal government eventually collects significant tax revenue because when workers withdraw money from their retirement accounts, they generally pay ordinary income taxes, not only on the original savings, but also on the accumulated, compounded earnings.

      Our analysis of a typical middle income worker shows that over the course of a 40-year career, for every $1 of taxes deferred, the federal government collects at least $4 in tax revenue when the contributions and earnings are withdrawn[4]

      With $10.5 trillion[5] currently saved in worksite retirement defined contribution plans and IRAs, the government will be collecting significant tax revenue for many years to come. Without those incentives, I doubt Americans would have saved nearly that amount.

      1 The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) EBRI/ICI 401(k) Accumulation Projection Model July 2005,

      2 “The Keys to Retirement Savings” Wall Street Journal, April 25, 2013 http://blogs.wsj.com/totalreturn/2013/04/25/the-keys-to-retirement-savings/

      3 Politico December 20, 2012 http://www.politico.com/story/2012/12/letter-to-the-editor-85317

      4 Analysis by the Principal Financial Group. See Appendix I for assumptions used

      5 Investment Company Institute, “Retirement Assets Total $19.5 Trillion in Fourth Quarter 2012,” News Release, March 27, 2013.

  • Mark S

    Item 1 requires further explanation. What caused the majority of balances to exceed pre-financial crisis levels? Was it primarily due to market performance rebound or to increased contributions? Those able to do so will invest more when they can buy more in anticipation of selling for more later. I can quote for a fact that my savings account balance is higher than it was before the crisis. But I’m not going to put all of my money there.

    Furthermore, how many defined employer sponsored retirement plans are defined as mandatory instead of voluntary? Yet, automatic enrollment and default contribution rates are mandatory participation. Regardless that the employee has the “responsibility” to notify if they do not wish to participate. Some employees realistically cannot afford to participate. Some employees can afford to participate but choose not to because they have their own retirement plan to follow or because they choose not to plan for retirement at all. For context, my personal ability to contribute into my employer’s “voluntary” program is dictated by the participation (in some cases, automatic) of my fellow employees.

    • Larry Zimpleman, chairman, president and chief executive officer, the Principal Financial Group

      Thanks for your comment. To respond to your question about account values now above the level prior to the financial crisis: EBRI’s analysis shows that is true for those who were continuous contributors throughout the crisis. Employer sponsored plans have the “built in” mechanism of dollar cost averaging. By making deposits every payroll period, people are dollar cost averaging which allows them to take advantage of market gains. Study after study shows that dollar cost averaging leads to higher returns over time. It never pays to try to time the market.

  • John Parks

    Hi Larry,
    Thanks for you excellent discussion of the U.S. Retirement Evolution. Having the honor of being a part the retirement system for a working lifetime plus a few years of personal retirement I have watched that evolution for quite some time and would like to add one perspective that derives its origin from Pensions 101 so may years ago. Frist, it is important to concede the myriad of reasons for the decline in Defined Benefit plans namely; overly rich benefits, unrecognized liabilities, lack of employee appreciation / understanding, government regulation, accounting mandates and investment markets. Given that, a strong retirement system still needs to incorporate the advantages (which I shall not preach to the choir by enumerating) of both a DB plan and a defined contribution plan. An affordable basic defined benefit pension plan upon which is superimposed a defined contribution approach still seems to address the advantages of each and yet can avoid the pitfalls that created the decline in DB coverage. I do recall that both Principal and ASPPA promoted the idea of DB(k) which unfortunately was pushed out of practicality by onerous regulations and a misunderstanding of its purposes. I continue to and strongly support this concept and do believe that it might play a role in the evolution that you describe.