The United States isn’t the only country that encourages workers to use retirement accounts to save for the future.Some other countries provide retirement accounts similar to 401(k)s that offer clearer disclosures, simpler investments, and lower costs than most retirement plans in the United States.
A recent Government Accountability Office report recommends that the labour Department examine retirement accounts in these four countries for ideas about how to improve retirement accounts here:
Australia. Employers in Australia are required to contribute an amount equal to at least 9 per cent of an employee’s salary to their retirement account. Australian retirement accounts, which contained $853 billion in 2010, are generally set up as trusts, and various plans are managed by nonprofit trustees, retail for-profit trustees, or can be self-managed accounts.
Participants receive a product disclosure statement when they first join and annually thereafter that itemizes fund earnings and how much has been taken out of the account for administrative and investment management fees.
The statements are required to include a consumer advisory warning box, which encourages retirement account owners to shop around for investment options and contains an example of how high fees erode your final retirement account balance. Research by Ellis Connolly, deputy head of the economic analysis department at the Reserve Bank of Australia, found that Australia’s compulsory pension accounts have increased household wealth and raised self-funded retirement incomes.
Chile. Chilean workers are required to contribute 10 per cent of their salary, plus an additional amount to cover certain fees, to a retirement account. Employees choose among six for-profit pension service providers to administer their account. Each pension service provider offers five different investment funds with varying risk levels that are subject to specific regulations.
The Chilean pension regulator requires that statements be sent to participants every four months, and that they include a summary of fees paid, a table with a comparison of fees across all plans, and a personal estimate of the amount workers will have upon retirement. Fees are expressed as a percentage of the account balance and in Chilean pesos.
Participants also receive information about what they would have been charged if they belonged to the other five plans, and how much money they could save if they switched to the lowest-cost option.
“The surest way to get a return is to reduce costs, and Chile does that through fee-disclosure requirements that have been carefully thought out, and they have a default fund for new entrants,” says Estelle James, an emeritus professor at SUNY Stony Brook and an international consultant on pensions and social insurance. New employees are defaulted to the lowest-cost plan provider for two years.
“Because of inertia, many of them are likely to stay there afterwards,” says James. “This not only reduced costs for the first two years, but it is also likely to reduce future costs over time.” Workers collectively have $148 billion invested in the system.
Sweden. Swedish workers and their employers are required to contribute 2.5 per cent of pay to individual retirement accounts. These accounts, which contained about $62 billion in 2010, are all managed by a government-run clearinghouse, the Swedish Pensions Agency. This government agency contracts with service providers that perform investment management, and there are nearly 800 investment options for participants to choose from. Funds are required to report their fees to the Swedish Pensions Agency, and the agency publishes fund management fees for all investment options in the system on its website.
The Swedish Pensions Agency sends information about the administration and fund management fees paid to all retirement account participants annually. The average fees paid by all retirement account participants is also provided for comparison.
The default investment option for workers who don’t select their own investments is a public option mandated by the government to be cost-effective. The equity portion levies a 0.15 per cent fee and the bond portion charges a 0.09 per cent fee. “Reducing fees is important,” says James. “If you reduce fees by 1 percentage point, you raise the lifetime annuity by 20 per cent.”
United Kingdom. Beginning between 2012 and 2017, all employers will be required to automatically enroll eligible employees in a retirement account and provide a minimum contribution. Employers that do not offer a retirement account can automatically enroll their employees in a new national retirement account, the National Employment Savings Trust (NEST).
Initially, a minimum of 2 per cent of earnings must be contributed, with at least 1 per cent coming from the employer. The contribution amount will increase to 8 per cent by 2018, with the employer contributing a minimum of 3 per cent, up to an annual contribution limit of £4,400. NEST will levy a 0.3 per cent annual management charge and a 1.8 per cent charge on contributions.
“I have been very impressed with the mechanics that underlie how the NEST will operate. Should the scheme succeed, then I believe it will provide an excellent example of current best practice in the specification of private pensions,” says Justin van de Ven, a senior research fellow at the National Institute of Economic and Social Research in London. “Should it fail, then I suspect that it will provide a case study of poor implementation.”
In contrast to retirement accounts in these four countries, U.S. retirement accounts are entirely voluntary for both employers and workers. And the labour Department’s new fee-disclosure requirements will not actually show employees the effect of fees on their accounts over time in dollar amounts or the cumulative amount they have paid.
“While labour has made recent improvements to U.S. participants’ fee disclosures, fee disclosure improvements made by some of the countries we reviewed may provide more transparent disclosures,” the GAO report found.
“U.S. participants typically do not receive the simple, useful, and more targeted information about their defined contribution retirement plans and investment options that is provided to participants in Chile, Sweden, and Australia, which could be why recent research shows that U.S. participants have misconceptions about the fees they pay.”
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