Experts open playbook on retirement plan reform

Elizabeth’s note: Retirement reform has been bubbling under the surface through a summer and fall that has been dominated by health care and financial services reform. Next year, while the financial crisis is still fresh in most people’s minds, many observers expect retirement reform to shift to the center of debate. In the midst of reporting on a story about how the retirement system may be stacked against women, I e-mailed Ron Rhoades, the director of research and a leading thinker in the RIA regulatory world. He sent me back his thoughts about retirement reform. (I haven’t seen an outline this clear since my seventh-grade English class). I’ve posted them here, along with links to some other ideas and reports that have emerged this year. The later third of this posting includes some well-worth-reading thoughts from Putnam Investments CEO Robert Reynolds. Feel free to add to the comments section, or e-mail me any of your thoughts, and I’ll add them to the body of this story.

Ron Rhoades: Get rid of the mishmash of complexity

I would encourage more fundamental, over-reaching reform of retirement accounts – we have far too many types of accounts, and tax complexity. I would suggest:

(1) Any employee can contribute up to 25% of their compensation to retirement accounts in any year, up to a maximum of $50,000 per year. If a couple is married, they may contribute up to 25% of the combined compensation to retirement accounts in any year, up to a maximum of $100,000 per year (*amounts are subject to annual CPI adjustments).

(2) It makes no difference as to whether contributions are made to either the husband’s or wife’s retirement accounts, regardless of whether one or both is working.

(3) Income-tax free transfers between husband’s and wife’s accounts are permitted, as suggested in the professor’s article.

(4) Congress replaces the current mismash of retirement accounts (traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), 457, etc.) with four types of accounts:

(A) Employer-sponsored retirement accounts (ESRA), which have the following provisions:

(1) Vesting of employer contributions either:

(a) immediately; or

(b) one year after contribution;

(c) pro rata, up to five years (maximum), after contribution;

(2) Employer is free to match (or not match) up to any percentage – but maximum contributions to retirement accounts (regardless of whether employer-provided or employee-provided) are $50,000/year (for couples, up to $100,000 per year);

(3) Loans may or may not be permitted. If permitted, maximum loan amount is $10,000.

(4) Auto-enrollment (unless opt out)

(5) Auto-investment selections (unless opt out)

(6) Both tax-deferred and tax-free (Roth) alternatives always available;

(7) All advisors to plan sponsors and to plan participants must be fiduciary advisors at all times, and must be completely independent of the investment products to be offered in the plan;

(8) Advisors may provide advice to individual participants and deduct fees for such advice directly from the plan;

(9) All fees of investment options in the plan fully disclosed annually – including estimates of “hidden fees” of pooled investment vehicles (brokerage commissions paid by the fund, bid-ask spreads, market impact, opportunity costs) – all quantified and a “total fees and costs estimate” provided as to each investment option, along with a statement that (“On average, higher fees and costs for similar types of investments result in lower net returns.”)

(10) standardized “check-the-box” IRS form, instead of having to pay a plan adminstrator to draw up a plan and/or undertake amendments to it from time to time;

(11) Simplified 5500 filings – what information does the IRS really need?

(12) Participants may transfer vested balances to self-directed IRA / Roth IRA accounts once each year, if and as they desire.

(13) Plan sponsors (employers) are not required to utilize advisers; if they do utilize advisers to assist them in selecting plan investments to be provided to employees, they shift their fiduciary liability relating to same to the adviser. Advisers to plan sponsors must provide up-front, and annually, full disclosure of all fees and costs paid by plan sponsor, and who receives same. Again, all advisers must accept broad fiduciary duties of due care, loyalty, and utmost good faith, in order to provide advice to plan sponsor, and must be completely independent of any products recommended.

(B) Self-directed IRA accounts;

(C) Self-directed Roth IRA accounts; and

(D) Defined benefit accounts (one standardized version of same, with “check-the-box” IRS form indicating options selected); simplified 5500 filing.

Robert Reynolds: Calling for better advice

Robert Reynolds, the CEO of Putnam Investments, began calling for retirement reform late last spring, and has kept it up with a blog at https://www.theretirementsavingschallenge.com. In May, the blog posted an outline on major measures for reform. I especially took note of the third item under oversight/regulation, which sounds something like a fiduciary standard.

Oversight/Regulation

Creating a new national insurance charter, a national insurance regulator, and a fund to back up lifetime income guarantees from insurers. The fund would be similar to that which the Federal Deposit Insurance Corporation maintains to protect bank deposits.

Curbing the volatility of highly popular lifecycle funds by limiting the share of equity investments in the mature phase of lifecycle funds for people nearing retirement or in retirement. Some lifecycle funds, intended for those nearing or in retirement, had more than half of their assets in equity securities in 2008, Reynolds noted, worsening the impact of last year’s declines on those who needed to draw on their nest eggs for current income.

Mandating that retirement plan advisors and providers make full, transparent disclosure of fees, risks, and responsibilities in plain English, without burdening participants with irrelevant details.

Providing clear, strong legal protection to employers who offer advice and guidance and to those who include lifetime income guarantee products in their savings plans.

Plan Design

Mandating automatic enrollment, savings escalation, and guidance to qualified default options for all employer-sponsored retirement savings plans.

Requiring that workplace savings plans build in an option to secure a “retirement paycheck,” enabling any participant to choose an assured lifetime income option in the form of annuities or other insured, non-annuity income streams.

Robert Reynolds advocates requiring that workplace
savings plans build in an option
to secure a “retirement paycheck,” enabling
any participant to choose an assured
lifetime income option in the form
of annuities or other insured, non-annuity
income strea

Ensuring that all workplace savers have access to the advice and guidance they need for asset allocation, retirement planning, and lifetime income strategies.

Recognizing the growing importance of alternative risk-mitigating investment options and strategies (e.g., longevity insurance, absolute return).

Tax Incentives

Extending tax credits to employers who voluntarily “match” worker savings contributions since these employers are helping to meet a national savings challenge. Workers’ own contributions are already tax-advantaged.

Providing additional tax incentives to employees who invest in protected lifetime income products. Since converting life savings into lifelong income is even more challenging than accumulating a nest egg in the first place, the decision to give up some control of assets should be rewarded.

Paula Monopoli: Share and share alike

Monopoli, professor of law at the University of Maryland School of Law, published Marriage, Property and [In]Equality: Remedying ERISA’s Disparate Impact on Spousal Wealth! in the Yale online journal. It’s excerpted here:

Congress is considering pension reform in the wake of the tremendous loss in market value of retirement plans during the current recession. This offers a historic moment to remedy an unintended but profound gender disparity embedded in the federal law governing retirement plans in this country.

The common perception is that contemporary law and policy aim to facilitate equality within marriage, including in the area of property ownership. For example, the law has embraced equitable distribution in reallocating property upon divorce.1 Equitable distribution is grounded in a joint partnership theory of marriage that recognizes the contributions of both spouses, whether or not purely monetary. However, the Employment Retirement Income Security Act’s (ERISA) structuring of retirement asset accumulation runs counter to this trend and in fact incentivizes the concentration of wealth in the hands of husbands rather than wives within intact marriages.

There has been a movement over the past thirty years to transfer traditional pension obligations from employers to employees 3 through the use of a tax-preferred vehicle known as a “defined contribution” plan.

Why does facilitating an equal allocation of retirement plan balances matter in intact marriages? First, the law has an expressive dimension and it should value caregiving and equality as a matter of fairness and justice. Money equals power within a relationship and power asymmetry yields inequality.10 Encouraging a disproportionate accumulation of assets by the husband, even if unintended as a policy matter, signals that the spouse – typically the wife – who provides the bulk of the family caregiving makes a less valuable contribution.

Second, limiting the ownership of defined contribution plans to a single spouse subjects the other spouse to greater risk in terms of the overall family wealth. Consider the following example. A husband has a much larger balance in his 401(k) than his wife has in hers due to his uninterrupted employment history. The husband is very tolerant of the market risk involved in investing in stock and his entire portfolio is so invested.11 Assume that he has used his 401(k) as the primary family savings vehicle, given its favorable tax status, and it constitutes a significant percentage of the family’s overall wealth. Federal retirement and tax policy has effectively concentrated the power to control the family’s financial future in the hands of one spouse. While there are some restrictions on the husband’s ability to control distribution of the defined contribution plan without his wife’s consent under ERISA these are thin “protections” for the wife if the money has been lost in a market crash.