A new report from Morningstar evaluates retirement systems in eight “highly educated and wealthy countries” often cited in independent studies as being among the best in their regions. In a recent webinar reviewing the report, authors Andy Pettit, director, policy research at Morningstar, and Lia Mitchell, senior analyst, policy research, discussed some of the more effective features that they found in the countries that they studied and some areas that would benefit from change in those countries, including the United States.

The report, “Going Global: An Evaluation of Retirement Systems Around the World,” found that the hallmarks of the most effective workplace schemes are government-mandated contributions, savings incentives and transparent oversight or benchmarking of funds’ performance and costs. Countries evaluated included the U.S., Australia, Canada, Hong Kong, Singapore, Sweden, New Zealand and the United Kingdom.

Defined contribution plans tend to put investment risk on individuals. “Choice is good,” the report noted, but “too much choice is counterproductive, and some countries are better than others at limiting it so that participants are more likely to select a high-quality, low-fee, investment option or be defaulted into such an option.” The report illustrates that complexity is a common challenge across the countries’ retirement systems.

The authors warned against making a large roster of potential funds available for individuals to consider without adequate guidance or structure, as can be the case with Australia and U.K. employers, according to the report.

“While the more experienced investors may value this choice, we think it’s daunting for many people and compounds the chances of people just doing nothing for fear of choosing the wrong funds,” Pettit said. “The ideal is to find a way of offering a diversified portfolio that caters to a variety of risk profiles so that those who want to avail themselves of the choice can and those that don’t have got a much more guided architecture.”

Pettit said the balance of choice and complexity is an ongoing challenge for retirement systems.

“The U.S., to my mind, does the best with selecting a manageable range of investment choices that cover the asset classes and put a fair degree of downward market pressure on fake fees and keeping them competitive,” Pettit said.

A problem that the U.S system is battling and that is common in other countries is the difficulty for individuals of consolidating multiple retirement plans into a single plan as they switch jobs.

As potential guides for the U.S. and others, the authors noted that Australia has made it so that employers can fund an employee’s existing pension plan, rather than creating them a new one when they join a firm. In addition, Canada has a feature that allows employees to transfer and consolidate their old plans into a single, locked-in retirement account.

Mitchell said the Canadian approach brings challenges because it does not allow individuals to access the funds before retirement through hardship withdrawals. The Australian approach of having the account follow the individual from job to job “in many ways is best in class,” she said. With people changing jobs at a high frequency in the U.S., for instance, that approach helps prevent fragmentation and discourages people from having a series of small balances or opting to cash out early, she said.

“That obviously requires a very coordinated and connected system to be in place,” Lia said. “I think it’s something that could be a challenge to implement in other markets, but it is a very nice feature of the market and addresses many of the problems when it comes to individuals changing jobs.”

The report called auto enrollment “the single most effective solution to encouraging retirement saving.”

“Auto enrollment has clearly been a success in the markets that have introduced it,” Mitchell said. “While there are differences in implementations in terms of contribution levels, eligibility based upon a general salary, and in terms of the ability to opt out, all the countries that have adopted it have seen increased numbers of employees in pension schemes.”

In particular, Hong Kong and Australia make participation in retirement plans mandatory, while the United Kingdom and New Zealand give employees an option to opt out. Criticisms that arise to those approaches is that it can give employees a false sense of security about how much they are saving toward retirement, and they do not realize that the automatic enrollment has them saving at minimum levels that will not secure a comfortable income unless they raise that investment level, Mitchell said.

Mitchell said the U.S. has the lowest and most-competitive fees across the globe. Mitchell said the U.S. system also provides effective oversight of performance in relation to some of the other countries assessed.

“In the U.S., plan sponsors are required to act as a fiduciary for the plan, putting the vested interest of participants first,” Mitchell said. “The U.S. achieves this or monitors this in some ways through the ability of participants to form a class and pursue any damages that they perceive in the courts. And so litigation has, in many ways, driven costs down and the quality up of the US plans, as large plan sponsors in particular, are increasingly reminded of their need to act as a fiduciary and to be able to document and demonstrate the quality that they’re delivering to their participants.”

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