Lessons from turbulent times: TIAA-CREF chief urges more tools, teaching for smarter investing

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TIAA-CREF chief: lessons from turbulent times

Americans need to get smarter about how to invest for their future.

That’s the main message from Roger W. Ferguson Jr., president and CEO of TIAA-CREF, in a recent interview.

Ferguson notes that even as people take on more responsibility for their investments, they still aren’t saving enough for retirement. He urges giving Americans more education and tools so they can achieve a more secure future.

Ferguson joined TIAA-CREF, which offers mutual funds and other investment products geared toward higher-education workers, in 2008. He is also a member of President Barack Obama’s Economic Recovery Advisory Board, and served as vice chairman of the board of governors of the Federal Reserve. He was the first African-American to hold that office.

Ferguson spoke with Associated Press Personal Finance Editor Trevor Delaney about his thoughts on saving for retirement.

Q: We’ve had turbulent times in financial markets during the last two years. What have they taught us about our retirement system, both bad and good?

A: Well it’s taught us a couple of things. One, it’s taught us that the system is fragile. All three parts of the system (employer pensions, personal savings and social security) have come under a lot of stress, as you know. We’ve learned again how fragile social security is. We clearly know that there are very few people covered by defined benefit plans compared to historical norms. This crisis, in particular, has shown that defined contribution plans, like the 401(k), are very vulnerable to the ups and downs of the market.

One of the system’s strengths is indeed that, as markets return, the values in people’s 401(k)s do too. I saw someone say that their 401(k) had become a 201(k) and now it’s back to a 301(k). But the other thing that we’ve learned is that even with that, people aren’t saving enough for retirement, so I think we’re still confronting a retirement crisis.

Q: We hear a lot of discussion about regulatory fixes for the retirement crisis. But a key to getting people to save more is to change their attitudes. How can we do that?

A: One way is you take advantage of this crisis to have people look (and pay attention). Secondly you really have to put a focus on much more discussion every day. The American people are pretty savvy. The more you talk about the problem, the more you talk about their responsibility, the more likely they are to respond appropriately.

Because after all, everyone knows that at the end of the day they have a responsibility to provide for their own retirement. But you have to educate them about how much is enough, and how they can make their retirement as safe and secure as possible.

Q: You talk about individual responsibility and you also mention the shift from a system of traditional pensions to 401(k)s. Did that shift go too far? Was it a mistake to trust us to take care of our own interests?

A: I think in many ways you have to recognize that it was almost inevitable. Not everyone would agree with that. There are those who would say that it wasn’t. But I think the reality is that corporate America, looking at the size of this liability on their balance sheets, was always likely to try to find a way to have some of that responsibility spread more evenly.

“Was that a mistake?” No, I don’t believe it was a mistake. I think that the problem is that the 401(k) was never meant to be anything other than a supplemental retirement system. And people have now come to recognize that that’s really all it was. But it’s not a mistake to have people take responsibility for their futures. I think the issue is to educate them and to give them the tools to do that responsibly.

Q: You spoke about raising the savings rate. Is that really what it all boils down to?

A: The savings rate is one aspect. We have to make it easier for people to save and give them guidance on how much they should save. So that’s having automatic enrollment, which the administration has encouraged already. And we need to have an ongoing discussion telling people that between what they save and what their employer might contribute, they should be aiming at between 10 and 14 percent savings. But that’s just the beginning.

The second element is that you really have to give people non-commissioned and objective advice. Most people are simply not financial experts, but with good objective and non-commissioned advice they will probably end up making the right decisions.

The third element is giving them an appropriate degree of choice. Behavioral economists tell us that when they have too much choice, individuals are frozen in place. If they have too few options, by definition they have too few options. The optimum number of choices seems to be somewhere around 15 maybe 20 choices — different kinds of investment options to cover the range and to deal with everybody’s risk appetite.

Fourth and most importantly — the thing that all of us have to put our heads around a bit more — is the need to have a safe and secure income throughout retirement in the form of a low-price, relatively transparent, relatively easy-to-understand annuity. And I think we need to have a more honest debate around the value of having income security, guaranteed income through retirement.

And also related, but not at the core, is making sure that people recognize that they also need to save enough for their health care expenses. The good news for all of us is that life expectancy is getting longer. The bad news is that means that you need to save that much more for the inevitable medical expenses that come with aging.

Q: You referred to the need to have a more “honest” debate. What do you mean?

A: People have to understand that there really are ranges around the annuity discussion. There are some annuities that aren’t transparent, that are very complex — that perhaps are not appropriately managed for the ups and downs of the market. There are other annuities that are relatively low cost, that are relatively transparent, that are simpler. So we really need to recognize that there is this range, and encourage people to look toward those annuities that are really consumer friendly.

The real issue is that people’s life expectancies are getting longer, and individuals are not all experts in managing their funds, so what our research has shown is that people should annuitize a part of their savings. And they want to annuitize their basic needs — food, room, board — that kind of thing. That’s the guaranteed fixed part.

And then you want to have a part of your savings that continues to be exposed to the ups, and sometimes the downs, to deal with inflation and to deal with variable consumption needs. Things like vacations and providing a gift to someone.

Q: The idea that you can sell your house for a big gain and then downsize is a big part of many people’s retirement plans. Have individuals relied too much on housing, and is there a systemic change that can be made so it’s put in proper perspective?

A: I think during the go-go years of the housing market, people did rely too much on capital gains. Not just in housing, but also equities, and they saved too little. So for a long time the official measured savings rate in America was zero — even occasionally negative. And that’s because people assumed housing prices would keep rising, and equity prices — although volatile — would have a general upward trend. So I think people relied too much on capital gains embedded in assets as a form of savings, as opposed to actually putting aside a portion of their paycheck.

So there will have to be a change in mindsets so people recognize that the housing asset, while it may be the largest single asset, cannot be thought of as the ultimate piggy bank.