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401(k) plans could be facing a total revamp
By Doug Halonen
House Democrat George Miller is calling for a soup-to-nuts re-examination of 401(k) plans in light of dramatic investment losses this year that could lead to a radical overhaul of the popular defined contribution plans.
One proposal under consideration would eliminate the tax-favored treatment of contributions to 401(k) plans and individual retirement accounts; instead, workers would receive a $600 tax credit that would offset contributions to a new mandatory guaranteed plan that would be managed and administered by the federal government. Another proposal would extend 401(k) plans to all workers.
“Maybe we are at a time where fiddling at the margins is not going to serve the American people,” Mr. Miller, D-Calif., said at a House Education and Labor Committee hearing in San Francisco on Oct. 22.
Meanwhile, in a little-noticed policy plank, Democratic presidential candidate Barack Obama is calling for much greater disclosure of defined benefit investments to plan participants — including revealing “probable future investments” by these plans (See related story).
While retirement income policy has been largely ignored during the election campaign — except for calls by Sen. Obama, D-Ill., and Sen. John McCain, R-Ariz., to loosen access to 401(k) accounts and expand coverage of workers without plans — these new proposals could lead to sweeping changes for U.S. corporate retirement policy.
Major losses in retirement savings are spurring Mr. Miller's effort to consider rewriting the ground rules for 401(k) plans. At the San Francisco hearing, Mr. Miller said a more comprehensive legislative review is required because 401(k) plans and IRAs collectively had lost $2 trillion from equities alone in the year ended Oct. 9, according to new paper by Alicia Munnell, director of the Center for Retirement Research at Boston College. Ms. Munnell also estimated that defined benefit plans experienced $1.9 trillion in stock losses during that time.
“This requires a wholesale re-examination,” Mr. Miller, the influential chairman of the committee, said at the hearing.
Disclosure bill on hold
Earlier this year, Mr. Miller was promoting legislation that would have required more stringent disclosure of 401(k) fees, but put the measure on hold because of opposition from the mutual fund industry and employer groups.
“More than ever, there is an urgent need to help Americans strengthen their retirement savings,” the lawmaker said. “We can't allow the promise of a secure retirement for workers to become a casualty of the financial crisis.”
Mr. Miller said he wants to study a proposal to create so-called guaranteed retirement accounts advocated by Teresa Ghilarducci, a professor at the New School for Social Research, New York.
The accounts are similar to defined contribution plans in Italy, Latvia, Poland and Sweden, as well as the giant TIAA-CREF system run for U.S. academics.
Under Ms. Ghilarducci's proposal, which was laid out in a briefing paper published late last year by the Economic Policy Institute, Washington, a liberal think tank, 5% of a worker's earnings would be placed in the plan each year, with workers and their employers each contributing half, except where an employer provides an equivalent or better defined benefit plan. Workers would receive a $600 annual tax credit for their contributions, and they could make additional after-tax contributions.
Ms. Ghilarducci said her proposal would apply to corporate and public DC plans.
The accounts would be administered by the Social Security Administration, and the funds would be managed by the federal government's Thrift Savings Plan or a similar governmental agency. Employees would receive a fixed guaranteed 3% real return. If actual investment returns exceed that level for a number of years, the surplus would be distributed to participants, although a reserve fund would be maintained for rocky financial periods.
Fully portable
The plans would be fully portable. A full-time employee who worked for 40 years and retired at age 65 could expect a benefit equal to roughly 25% of pre-retirement income, adjusted for inflation. Combined with a Social Security benefit of roughly 45% of pre-retirement income, such a worker would receive a total benefit equal to about 70% of pre-retirement income. Taxpayers making more than $75,000, would, on average, receive lower after-tax benefits, the paper said.
What's more, account balances would be converted to inflation-indexed annuities upon retirement, although individuals could take a lump sum equal to 10% or their account balance or $10,000, whichever is higher.
Workers who die before their retirement could bequeath only half their account balances to heirs; those dying after retirement could leave half their benefit minus benefits already paid out.
To pay for the new accounts, the government would eliminate tax breaks for 401(k) plans — currently up to $15,500 per employee per year. (Participants aged 50 and older can contribute an additional $5,000 a year tax free.) Existing DC plans, according to Ms. Ghilarducci, would not be abolished, but additional contributions would no longer be tax-deferred.
“Accumulations in 401(k) plans and other retirement plans that exist before the bill goes into effect will be treated under the old tax rules,” Ms. Ghilarducci wrote in her paper.
“It would be extremely expensive to subsidize both 401(k)s and guaranteed retirement accounts, and the latter are a much more effective and equitable way to increase retirement savings,” Ms. Ghilarducci wrote.
A less radical idea under consideration would permit all workers to contribute to “universal” 401(k) plans.
At the hearing, Jacob S. Hacker, a professor political science professor at the University of California, Berkeley, said the investment default for the universal 401(k) would be a low-cost target-date fund, paid out in annuities at retirement.
“In essence, universal 401(k)s along these lines would bring back something close to a guaranteed private pension,” referring to the plan's annuitization feature, Mr. Hacker said in his testimony.
A hard sell
Industry lobbyists said any new reform proposals will be hard to sell, particularly if they are financed by cutting back on the existing tax deferrals for 401(k) contributions.
“It's going to be difficult because people like their 401(k) plans,” said Bill Sweetnam, a partner with the Groom Law Group, Washington.
The prospects for Ms. Ghilarducci's proposal are considered dim by some lobbyists. For starters, while the existing retirement system in the U.S. is voluntary for employers, Ms. Ghilarducci's proposal would require participation. In addition, while investments under existing retirement plans are managed by private-sector money managers, investments in Ms. Ghilarducci's plan would be managed by the federal government.
“It's a non-starter,” Paul Schott Stevens, president and chief executive officer of the mutual fund industry's Investment Company Institute, Washington, said of Ms. Ghilarducci's plan. “It's puzzling in the (financial) course we are in now that the committee would give currency to that proposal.”
“We believe the current employer-sponsored system is a good one that should be built on,” added Jan Jacobson, senior counsel, retirement policy, American Benefits Council, Washington.
“It (Ms. Ghilarducci's proposal) is subsidized by workers who die early and forfeit their assets,” added Ed Ferrigno, vice president of Washington affairs, Profit Sharing/401(k) Council of America, Chicago. “I don't think there's any prospect for her exact version.
“There may be some elements in it that may end up being considered.”
“There isn't anybody out there who is serious that is supporting that kind (Ms. Ghilarducci's) of plan,” added Mark Ugoretz, president of the ERISA Industry Committee, a Washington-based group representing employers. |
