October 16, 2018

The Brookings Institution “The New American Dream: Retirement Security A Conversation with SEC Commissioner Kara Stein”

Opening Remarks

Aaron Klein, Fellow, Economic Studies, and Policy Director, Center on Regulation and Markets, The Brookings Institution

In his opening remarks, Klein said that Americans are living longer, creating a new set of economic challenges to address how people save, what economic opportunities are available to them, and what investor protections are working to protect them. Klein said this new reality will require a new policy framework to tackle challenges in ensuring Americans have security, wellbeing, and comfort in their retirement years.

Keynote

Kara M. Stein, Commissioner, U.S. Securities and Exchange Commission

In her keynote, Stein said retirement security in the U.S. is “increasingly tenuous,” noting that many Americans are working past traditional retirement age, bankruptcies for individuals over age 65 have increased, and as our population is aging, so is the cost of medical care. Stein explained that the U.S. retirement system was originally built on a “three-legged stool” approach, assuming that retirees would combine pension, Social Security, and personal savings to provide financial security, with each “leg” being historically insufficient when standing alone but together forming a strong foundation. She continued that now, however, the Social Security trust fund is declining, the availability of private sector pension is diminishing, and public sector pensions are facing financial problems, leaving many Americans as the most significant form of income in retirement.

Stein said solutions to the retirement crisis are “multifaceted,” citing steps the Securities and Exchange Commission (SEC) can take to improve outcomes for America’s retirees. Stein said the SEC can work to build financial capacity and investing acumen through financial literacy work. Stein said it was important to educate investors not once they have enough money to invest, but much earlier. Stein added, however, that investor education can only go so far, and the SEC needs to ensure investors have the tools they need to make good financial decisions, understand risks, and understand disclosures. Stein said it should be easy to compare investments and the industry should be using technology to help investors process information about their investments. Stein also suggested the President should issue an executive order to create a working group on retirement security, bringing together various agencies and major market participants to develop solutions to enhance the state of retirement security in the U.S.

Stein noted that the average American is not a professional investor, so many turn to financial professionals for investment advice. Stein said the SEC must ensure those financial professionals are giving investors unconflicted advice, adding that there is an “expectation gap” for consumers regarding which rules apply to which investment professionals. Stein said the SEC found in a survey that most investors expect acting in their best interest equates to a very high level of investor protection, and that most investors assume those giving them financial advice have to put their interests first. Stein said there are two options to ensure expectation meet reality: raise the duty owed by all investment professionals, or teach investors to treat the advice they receive from certain professionals differently. Stein concluded that because informing investors is a complicated process, it would be easier to require all persons giving investment advice to put their client’s interest first.

Stein also discussed the importance of incentivizing savings, saying the SEC and other agencies should examine other methods to encourage individuals to save, including employer tax incentives for increasing savings participation by employees, the option for individuals to deduct the cost or retirement advice, tax exemptions for pension refinancing bonds, and other public policy ideas to incentivize savings and investing.

Stein addressed the importance of strong investor protections, particularly from fraud. She said strong deterrents are critical, and should include meaningful penalties. She discussed the importance of financial professionals on the front lines of detecting senior financial exploitation, saying that financial professionals should be able to alert trusted contacts if they suspect exploitation.

Fireside Chat

Martin Baily, Senior Fellow, Center on Regulation and Markets, and Bernard L. Schwartz Chair in Economic Policy Development, The Brookings Institution and Commissioner Stein answered audience questions, including how market volatility can harm retirees, the decumulation phase of retirement saving, incentivizing companies to go public, and short-selling, among others.

Regarding the SEC’s proposed Regulation Best Interest, Stein said the SEC has received an “overwhelming” number of comments and staff are currently working through them. She said how the SEC proceeds will be, to some degree, based on what is learned from the comment period.

Regarding market volatility, Stein noted that volatility is a normal part of capital markets, but it is an important factor in why retirees should not rely solely on the markets for their retirement security. She said the markets are for many things, both short-term and long-term investments, and people will choose to invest differently based on their goals. Stein said that as the markets have gotten more complicated, people have rightly chosen to enlist the help of experts, reiterating the importance of consumers understanding their relationship with their financial professional.

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