The Administration’s Retirement Agenda
I recently received an email from a client inquiring whether I knew of any legislation proposed by the Obama Administration to nationalize 401(k) or other retirement plans. I was not immediately familiar with the details of the proposed legislation, but I was curious to learn about the Obama Administration’s retirement agenda. What I learned has not been widely publicized because the economy, health care, and the environment have taken center stage, but if passed as anticipated, it could significantly affect millions of small businesses and the way Americans save for retirement. Let me explain.
In 2009, the Obama Administration created the Middle Class Task Force designed to address retirement and other issues affecting the middle class. The task force developed four initiatives regarding retirement:
- Improve the transparency of 401(k) fees to ensure plan sponsors and workers receive services at a fair price;
- Encourage plan sponsors to make unbiased investment advice available to workers;
- Promote the availability of guaranteed lifetime income; and
- Require clear disclosure regarding target-date funds, which shift the stock-bond mix of assets over time.
These initiatives are designed to address the lack of retirement savings by U.S. workers, a low plan adoption rate by small businesses, and the high percentage of retirees that are likely to run out of money.
As a result of the task force, President Obama’s 2010 budget proposed automatic workplace pensions that would require employers with 10 or more employees not currently offering plans to adopt an automatic Individual Retirement Arrangement (IRA) program. Employees would be automatically enrolled and required to contribute 3% of their pay to an IRA unless they opt out. Employers would have to satisfy annual disclosure requirements and designate a default investment option in “safe” securities such as U.S. Treasuries or money market funds. Those employers that currently offer plans would be required to automatically enroll all non-participating employees and escalate their contributions annually unless the employee opts out. It’s also expected we will see legislation that will require plan sponsors to have annuity or lifetime income options for defined contribution (401(k)) plan payouts.
I also learned the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) are assessing the inconsistency of target date fund products. After the financial market turbulence in 2008, many of these funds lost significant value despite their supposed glide path (i.e., how quickly the funds reduce their exposure to equities as participants approach retirement). The implication for plan sponsors is that there will be greater scrutiny of their fiduciary responsibility for prudent investment selection and ongoing monitoring. Just last month, DOL issued new regulations to increase the transparency and disclosure around fees associated with retirement assets, such as servicing and advisory fees as well as revenue-sharing agreements.
Undoubtedly, the American retirement system needs an overhaul and the improved access to retirement plans and savings incentives is a positive outcome of this legislation. Automatic enrollment in retirement plans and mandatory compliance will impose higher costs on small businesses, but some will see the benefits of increasing the financial security of employees a net positive for businesses in the long run. In my view, greater scrutiny of investments, increased fiduciary standards, enhanced transparency around fees and guaranteed lifetime income options would be encouraging developments for individuals saving for retirement. Default investments in Treasury securities or money market funds, however, will not provide the growth necessary over the long run to accumulate adequate savings to fund living expenses in retirement. Stay tuned, as it’s possible we will see action on retirement legislation in Congress at the end of 2010 or beginning of 2011.