BlackRock
Larry Fink's radical retirement recommendation
May 7, 2013: 2:20 PM ET
BlackRock's CEO says that the U.S. may need to make retirement savings mandatory.
FORTUNE -- BlackRock Inc. chief executive Larry Fink said during a speech Tuesday that longer life spans and underfunded retirement plans are the defining challenge of our age, and went so far as to recommend that the U.S. consider making retirement savings mandatory.
Fink acknowledged that retirement under-funding is not a new issue, but times have changed and the problem has become more pressing. "We're at a point now where the interest rate cycle makes it very difficult [for investors to save]," he said, during remarks delivered to a group of NYU Stern business school students. "If you can no longer buy a 30-year bond with a 7% yield, how will investors achieve the necessary savings outcome?"
"The current system is not working, and we need a comprehensive approach that includes some form of mandatory savings in addition to Social Security," the 60-year-old Fink added.
While the BlackRock (BLK) chief often speaks on retirement issues, he has never before suggested mandatory savings (perhaps something similar to what has already been enacted in Chile and Australia).
Fink explained that only two-thirds of Americans have saved for retirement and most have saved less than $25,000. The average retiree depends on Social Security for 70% of his or her income, he said, citing statistics from the Employee Benefit Research Institute.
"Social Security has become far more essential to retirement than intended when the program was conceived," Fink said. "When Social Security was launched, a 21-year-old male had a fifty-fifty chance of living to the age of 65."
Fink, who sits on the finance committee at NYU, described his speech as a call to action, particularly because politicians and business leaders ignore the retirement savings crisis. "This is a big public policy issue that we need to address, that corporations need to address, and that local governments need to address," he said. "We need a debate. We need to undertake a comprehensive review of retirement policy in America."
Fink and BlackRock approached the business school about a talk on the issue of retirement, a BlackRock spokesman said. Students were the right audience because they have time to do something about the crisis, and they have the energy and interest required to tackle big problems.
Fink noted that the entire financial sector is "wired for short-term incentives," which is exacerbated by the fact that we live in a "world of 9,000 tweets a second," and that this mentality makes it hard to think about long-term objectives. He said that investors should look beyond the short-term noise and keep money working in the markets for longer investment horizons.
He added that the shift from pensions to 401(k) plans does not absolve employers of their "moral obligation" to help employees save for retirement, saying that workplaces should provide education about retirement investing, matching funds, and auto-enrollment into 401(k) plans.
His most interesting critiques were reserved for the asset management industry, telling reporters after the lecture that "most financial institutions failed society" in the run-up to the recent financial crisis. During his remarks he said that companies like BlackRock should stop measuring products against benchmarks and start judging whether they meet investor liabilities and needs.
"Investors don't care if they're holding a mid-cap stock or Mexican government bond, but whether an investment helps them achieve long-term outcomes like sending their kids to college, buying a house, and funding a decent retirement."
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