April 10 Fidelity Investments President Ronald O'Hanley on Wednesday proposed that U.S. lawmakers increase the default savings rate to at least 6 percent in retirement plans, double the rate laid out in landmark legislation passed in 2006.
O'Hanley also said Congress should require programs that automatically increase savings rates in U.S. retirement plans. While he favors an opt-out provision, he said inertia tends to keep U.S. workers on the right savings path once they are automatically enrolled in a 401(k) retirement plan, for example.
A key problem, as he sees it, is that Americans are not saving enough to support themselves in retirement. He said Fidelity's research shows nearly four in 10 retiree households do not have sufficient income to cover their expenses.
"The proverbial four-legged stool - consisting of Social Security, traditional pension plans, defined contribution plans and personal savings - is wobbly at best, and by and large does not exist for most Americans," he said.
O'Hanley, who runs Fidelity's asset management division, made his proposals in remarks prepared for delivery at the U.S. Chamber of Commerce Capital Markets Summit in Washington.
His speech hit on themes he has been talking about since joining Fidelity in 2010 from BNY Mellon Corp. Fidelity, the second-largest U.S. mutual fund company behind Vanguard Group, manages $1.7 trillion in assets while serving as the largest administrator of 401(k) plans.
O'Hanley said the United States needs to act now "to avert the looming catastrophe America faces if we don't get serious about addressing the inadequacy of our retirement savings system."
He said Congress should build on the 2006 Pension Protection Act, which enabled automatic enrollment and savings increase programs while providing default enrollment into target-dated retirement plans.
"PPA enabled employers to use the power of inertia to put their employees on a better path to retirement security," O'Hanley said.
But he said the PPA's 3 percent default savings level is too low. It should be at least 6 percent, he said.
Employees who are automatically enrolled in company 401(k) retirement plans, for example, tend to stay in the programs regardless of the default contribution rate.
"Whether an employer sets an initial default contribution of 1 percent, 6 percent or anything in between, roughly 88 percent of employees accept the default rate," O'Hanley said.
He said policymakers should require automatic-increase programs as part of the design of retirement plans, unless employees choose not to participate.
"Automatic annual increase programs are the single most effective driver of employee contribution increases, accounting for close to a third of all contribution increases last year and nearly two-thirds of increases by workers in their early 20s," O'Hanley said.