American Association of State Colleges and Universities Summer Council

Remarks by Roger W. Ferguson, Jr.

Lake Geneva, Wisconsin, July 19, 2010

Good morning. Thank you very much for inviting me to participate in your Summer Council.

I appreciate the opportunity to address a distinguished gathering of university leaders – all the more so because I see many clients in the room.

To that end, we have a few other TIAA-CREF representatives here today. They will be happy to discuss questions about your finances. Please tap their expertise.

Being present during forums like this is a testament to the close relationship TIAA-CREF and higher education institutions like yours have built over many decades.

We value that bond and we want to keep it strong by being accessible and helpful, especially in a time of market volatility.

These are indeed challenging times for markets and for the economy more broadly.

After a significant upturn in markets in the second half of 2009 and the beginning of 2010, the second quarter saw market declines on the order of 10-12 percent across major indices.

The third quarter has started off well, as expectations for corporate earnings are high. Yet several factors continue to be viewed as potential headwinds that could dampen economic recovery.

European debt markets have been turbulent and markets are paying close attention for any signs of spillover effects.

U.S. employment, which is usually a lagging indicator of economic recovery, is living up to its reputation. The most recent jobs reports have shown muted hiring in the private sector. It is important to remember that even muted private sector hiring is a vast improvement over 2009.

Concerns about housing linger.

And after manufacturing and consumer confidence indicators had turned positive, those trends have moderated.

All in all, I expect we’ll see a slow and uneven recovery through the rest of this year. Some measures will show progress, others will indicate a bit of backtracking. But the general momentum, even if slow at times, and painful for people who are struggling to find work, should be toward recovery.

***

It’s in this context of change and volatility that I’d like to discuss the retirement challenge facing America and offer some thoughts on how we can craft comprehensive measures to help ensure that all workers have the opportunity to build financial security that lasts a lifetime.

The financial crisis illuminated the fact that most Americans are not prepared for retirement.

This was true even before the market downturn.

McKinsey has found that the average American family will be some 250,000 dollars short of what they need to retire securely.¹

A number of factors have contributed to this reality, but one stands out – the over-reliance on 401(k) plans as the primary retirement-savings vehicle.

From the 1990s onward, many Americans began to view the 401(k) as their primary means of saving for retirement, as companies stopped offering traditional pensions with defined benefits.

According to the Employee Benefits Research Institute, only 33 percent of private-sector employees had access to a defined benefit pension plan in 2008 – down from 84 percent 30 years ago.²

401(k) plans were initially conceived as a way for Americans to supplement the pensions made available by their employers.

But defined benefit pension plans are expensive for employers, who also have to assume all the market risk related to funding retirement obligations. And in an era of more frequent job turnover, a pension tied to one company doesn’t offer the flexibility many workers desire.

In eliminating defined benefit plans, employers have sought to bring some certainty to their retirement costs and shift much of the market risk to their employees.

During the strong bull markets of the 1990s and earlier this decade, employees were generally comfortable with that proposition. But when the market crashed, reality crashed in for many workers, especially those near retirement.

Without any guaranteed retirement income to rely on, Americans felt like the bottom had fallen out of their retirement plans.

***

Clearly, we need to rethink, repair, and restart America’s retirement system so that it provides opportunities for workers to achieve genuine retirement security.

We need a system that recognizes that most workers will be responsible for saving for their own retirement … but still provides a measure of security similar to what was available under defined benefit pension systems.

• A system that provides income that can last a lifetime – perhaps 30 or more years of retirement living.
• A system that will help retirees meet their uninsured health care expenses, which loom as a large financial burden to people living longer.
• And a system that will be sustainable even as the Baby Boom generation heads into retirement over the next two decades.

With 92 years of experience providing retirement income, we at TIAA-CREF are playing a leading role in this discussion.

Let me outline four elements that we believe are essential to building a sustainable, comprehensive retirement system for the 21st century.

The first is that all Americans should have opportunities to save adequately for retirement – which entails saving more for retirement.

Workers should be aiming to replace at least 80 percent of their final salary in retirement. To meet that target, they need to save at least 10-15 percent of their annual income.

It’s important to note that this 10-15 percent figure represents the combined contribution of both employers and employees. Few people are achieving this level of savings today.

A basic step to increase retirement savings is to ensure that workers have access to retirement plans.

Currently half of American workers don’t have access to an employer-sponsored plan. Among those who don’t have a workplace retirement plan, fewer than 10 percent have an individual account, such as a traditional or Roth IRA.

Where workplace plans are available, we should encourage participation by automatically enrolling workers.

According to the Government Accountability Office, auto-enrollment can increase participation in employer-sponsored plans to as high as 95 percent. But only 16 percent of employer-sponsored plans feature auto-enrollment.³

The Employee Benefits Research Institute reported last week that auto-enrollment has increased the number of Americans nearing retirement who are on track to have enough money to pay for basic expenses and health care costs.

Unfortunately, the number is still just a little over half of Americans – but that’s up from about 41 percent in 2003.⁴

We need to build on this momentum by encouraging employers to enroll their workers in retirement plans automatically.

The second element of our retirement plan for the 21st century is making available an appropriate range of investment options, as well as the advice and guidance to understand them.

Research indicates that 15-20 fund options should give savers the ability to diversify their investments. More choices than that could be confusing and actually lead people to choose less-diversified investments.⁵

We also know that the average worker – even a very well educated worker, like a college professor – is often stumped when it comes to articulating a savings strategy and choosing funds that are aligned with that strategy.

Too often the decision-making process comes down to picking the funds with the best performance over the past year – which of course is no indication of future performance – or outsourcing the decision to a friend or relative who may have some financial experience.

All workers should have access to advice that puts their best interest first. Non-commissioned advice if possible.

We also need to do a better job of promoting financial literacy – starting with young people and building through college and beyond. All Americans should have a basic foundation of knowledge about saving and investing. And this is an area in which your institutions and companies like TIAA-CREF can play an important role.

The third core element of a retirement system for the 21st century should be planning for long-term health care expenses.

The Employee Benefits Research Institute reports that without an employer-sponsored health plan, a couple retiring at age 65 today is projected to need between $200,000 and $800,000 to supplement Medicare and cover out-of-pocket health care expenses during retirement.⁶

That is a staggering sum for most people. And it can quickly erode savings that were meant for other purposes.

Workers need to start saving for long-term health care expenses today.

The fourth element of a 21st century retirement system is giving all Americans a guaranteed lifetime income option.⁷

This is how we can re-introduce the element of security that has been missing from most private sector retirement plans for the past three decades.

All workers should have access to an income stream they can’t outlive – at least to meet their basic expenses in retirement.

Because defined benefit pensions are a diminishing feature of the private-sector retirement landscape, workers need access to an annuity or another product that can provide steady income for many years.

These four elements – encouraging adequate savings, offering a range of options and objective advice, meeting retirement health care expenses, and providing guaranteed income options – should be at the root of our efforts to build a retirement system that helps all Americans save for a secure retirement.

***

One model that contains most of these features, and can therefore inform our thinking, is the model commonly used in higher education.

While there are differences between plans, most feature mandatory participation – auto-enrollment if you will.

Employees have access to an appropriate mix of investment options that help them to build savings.

Institutions like yours contribute to your employees’ retirement security while maintaining a degree of certainty about future costs.

And – most importantly – employees typically have access to either a defined benefit plan or an annuity that provides a level of guaranteed income in retirement.

This model is, on the whole, serving the academic community quite well.

Recent research from the TIAA-CREF Institute found that 80 percent of higher education employees described themselves as “somewhat confident” or “very confident” that they will have enough money to live comfortably in retirement.

Among all U.S. workers, just 54 percent report such confidence.⁸

If we’re doing something right in academia, we ought to think about ways to emulate that success in other sectors.

***

At TIAA-CREF, we’re hearing from other institutions, particularly state and local governments, which are facing acute difficulties meeting their pension-funding obligations.

According to Standard & Poor’s, total unfunded public-pension liabilities in the U.S. increased to 457 billion dollars in fiscal year 2008 from 368 billion dollars in 2007.⁹

If left unaddressed, this crisis could touch your employees who are linked to public pension systems.

States and municipalities are increasingly interested in a new hybrid model of retirement planning that reduces financial burdens on employers while providing a measure of security to workers. A model that blends the best features of the defined benefit and defined contribution systems.

TIAA-CREF recently reached an agreement with the government of Orange County, California, to provide an optional defined contribution retirement account that would supplement a new tier in their existing defined benefit program.

New county employees will have the option of taking a reduced defined benefit, and the government will match a percentage of savings directed to a 401(a) plan.

This hybrid system offers employees a measure of security through the defined benefit, while also helping Orange County rein in its long-term retirement costs.

We think the hybrid concept could be useful to many municipalities and other employers, and we’re discussing it with public policy leaders and the broader public.

For private-sector workers without access to a defined benefit plan, retirement income security would come in the form a guaranteed income product such as an annuity.

Earlier this year, we made our views known to the Labor and Treasury Departments, which had issued a request for information about the role of guaranteed income in retirement planning.

We shared our opinion that every American should have access to an annuity that provides …

• a guaranteed rate of return on savings accumulated during a person’s working years,
• guaranteed income in retirement,
• and costs that are low and clearly disclosed.

***

In addition to our work with employers and policymakers, we are engaged in our own efforts to boost savings in America. We recently launched a contest called “Raise the Rate” on our Facebook page.

You can find more information on our Facebook page or at “RaiseTheRateContest.org”.

We’re encouraging people to take the Raise Your Rate pledge and start increasing their personal savings rate.

And we’re challenging people to submit an idea to increase the U.S. personal savings rate to 10 percent from 4 percent in two years.

The entries will be judged by a panel of three experts and me, with the winner receiving a 50,000 dollar grand prize.

In addition, the college or university whose students, faculty, and alumni submit the most entries will receive a 25,000 dollar endowment.

We’ve already had close to 300 submissions. Schools are using the contest as an opportunity to educate their employees and students about the importance of spending less and saving more of what they make early in their careers.

I encourage you to spread the word on your campuses. The deadline is September 20th, so there will be a few weeks left for submitting ideas once the fall semester begins.

***

Let me conclude by recapping what I’ve discussed this morning.

The financial crisis and ensuing recession have shined a spotlight on the retirement crisis facing our country.

As the largest generation in American history begins to retire, we need to rethink, repair, and restart America’s retirement system.

A comprehensive and sustainable system should combine the best elements of defined benefit plans and defined contribution plans. It should be affordable for employers and give employees a measure of security through guaranteed income that will last a lifetime.

The retirement model that serves millions of employees in higher education contains several critical features that should be emulated more broadly – near-universal participation, sufficient savings, access to advice, and a guaranteed income option.

At TIAA-CREF, our specialty is helping people plan for their financial future, and we’re developing innovative solutions that are appropriate for the new retirement landscape.

We are also thinking creatively about a range of issues important to leaders like you.

This is a difficult time to be a college or university president.

Declining state support and private funding is forcing you to do more with less.

Federal stimulus funding has helped to cover some gaps, but that support is finite and will end in the next two years.

Regulatory changes are adding administrative burdens to an already demanding job.

And the changing nature of faculty hiring, tenure, and longevity is reshaping the way you meet critical personnel needs.

We want to help you think through these issues – in the retirement space and beyond.

We are offering a wider range of services – including a new Retirement Health Care Savings Plan, endowment management, planned giving services, and Spanish-language consultations and financial education – that respond to the evolving needs on your campuses.

TIAA-CREF has been a partner with the higher education community for nearly a century. As we overcome the current period of economic uncertainty and look ahead to how our institutions will operate in the future, we are committed to reaffirming that partnership and meeting and anticipating your needs.

Thank you very much for welcoming me today. I appreciate the opportunity to address so many leaders from across America about a topic of major significance to you, your institutions, and our nation. And now I will be happy to answer your questions.