Roger Ferguson, chief executive officer of TIAA-CREF, which provides retirement services to 5 million people at more than 16,000 academic, research and other nonprofit organizations, says that even if Americans increase their savings, when they stop working they'll need a guaranteed income, like traditional pensions used to provide.
How is TIAA-CREF different from most 401(k) plans offered by for-profit companies?
It was always a retirement plan and not just a savings plan to supplement a traditional pension, as 401(k)s were initially intended. So along with well-diversified and low-cost investment options — which not all 401(k)s have — there's also the option to roll savings into an annuity when you retire. It's a simple choice that guarantees a steady stream of retirement income as long as you live. U.S. employees in general need better, low-cost annuities they can choose as their retirement savings payout mechanism.
Don't many of the universities and other nonprofits that use TIAA-CREF offer especially generous matching contributions, such as a 100% match on employees' savings?
Some matches are quite generous, but not all. One thing that makes TIAA-CREF work is that it's recognized as a joint responsibility of employees and employers. So at many organizations there's auto-enrollment, resulting in high participation, and also auto-escalation of both employee savings and employer matching contributions. The thinking is, you're able to save more as you earn more, and this is a way to incentivize employees to do that. We need to find clever solutions, like this one, to the fact that we aren't saving enough.
What concerns you at a time when 10,000 baby boomers are turning 65 each day?
There's a large cohort of baby boomers without sufficient savings who are going to have to rely primarily on Social Security. A lot of people don't realize the average benefit [about $1,290 a month] is only enough to cover medical costs, which are rising, especially as we live longer and have to cope with chronic illnesses. Over the next five years, like it or not, the definition of retirement will have to change and people will have to work a little longer.
What's the best way to get younger people to save?
We need more financial literacy for all generations. Millennials are most comfortable learning from people their own age, not their parents' generation. They like blogs and videos that offer real-life vignettes. And you have to catch them at moments when they're making big life decisions like getting married, having a child or buying a home.
Is TIAA-CREF the prototype for retirement savings?
It's a great model for how a system is meant to work, and that requires having great performance. But there's not one silver bullet that will fix the retirement savings challenge — and we shouldn't let perfect be the enemy of first steps.