"Common' Sense

At a time when the nation’s legislative wheels seem mired in partisanship, the last week of January turned out to be a busy one for retirement plan proposals.

First the president unveiled his myRA concept in the State of the Union (along with a reference to an automatic IRA proposal previously included in the White House’s annual budget), followed a day later by introduction of the Retirement Security Act of 2014, a bipartisan proposal by Sens. Bill Nelson (D-FL) and Susan Collins (R-ME). A day after that, Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014, an updated version of his 2012 proposal.

All three were intended to expand and improve the retirement savings of Americans—although, as you might expect, the three take quite different approaches. Consider that the myRA calls for the development of a “new retirement savings security” to encourage savings in a kind of Roth IRA, while Sen. Harkin’s proposal would require employers above a certain size to offer a whole new type of retirement savings plan (and would impose some new threshold enrollment and withdrawal requirements on existing 401(k)s, as well). As for the Nelson/Collins proposal, it seems to be largely focused on lowering or removing certain current regulatory and administrative barriers to smaller employers offering retirement plans.

Despite their varied approaches to the commonly-stated goal of expanding retirement savings, all three do have one other key commonality: All look to leverage the success of the work place and systematic payroll deductions in fostering retirement savings. Of course, that’s a foundation whose worth previous EBRI research has documented:¹ the impact that eligibility for a work place retirement plan can have on retirement readiness,² as well as the additional help that automatic-enrollment designs can provide.

It remains to be seen whether the legislative proposals will go anywhere—and the potential impact of myRA on motivating new savers is also uncertain. Just this week, Senate Majority Leader Harry Reid (D-NV) introduced a proposal on defined benefit pension smoothing—not to provide any kind of help for retirement, but as a way to pay for a three-month extension of unemployment benefits.

But as America Saves Week nears, the activity on Capitol Hill serves as an additional reminder that a good place to start—any time, with or without the incentives of legislative change—is to Choose to Save. ®³

Nevin E. Adams, JD

¹ The January EBRI Notes, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is available online here.

² See “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here, and “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

³ You can find a wide variety of tools and resources—including the popular and widely recommended Ballpark E$timate—at http://www.choosetosave.org/

”Macro” Management

Last week, Senate Finance Committee Chairman Max Baucus (D-MT) outlined his overall goals for comprehensive tax reform, noting that he planned to use both the Domenici-Rivlin debt reduction plan and the fiscal recommendations of the president's Simpson-Bowles Commission(1) as the“starting points for full-scale tax reform,” citing the former in commenting that “‘Everything must be on the table' when it comes to tax and entitlement reform." The New York Times last Monday reported a “Push for a Fiscal Pact Picks Up Speed, and Power,” even as other published reports suggested that lawmakers would look to defer those votes until after the November elections.

Those headlines echoed the sense that EBRI CEO and President Dallas Salisbury outlined last month to the EBRI board of trustees at their spring meeting—a sense that broad-based tax reform would be the focus of Congress, with fiscal issues driving a focus on the macro impact of policies rather than the micro outcomes that might result. While there’s an acknowledgement that the“devil’s in the details,” there is also a growing sense that sweeping change is needed, and that—whatever the potential negative effects at the micro level, enacting change would be supported because it was seen as “best for the nation and the economy.”

Salisbury cited a meeting at which a senior congressional staffer noted that when Congress did act, it would include changes in the tax treatment of retirement plans—“we just can’t tell you what.” Later at that same meeting, a more senior official made it even clearer that those issues would be part of the equation, going so far as to outline about a half dozen specific provisions under consideration. Salisbury highlighted as“the most telling words in that senior staffer’s presentation” that “the biggest roadblock to meaningful action toward a rational retirement policy was“inter-industry competition”—the competition of firms within the retirement plan industry lobbying for different provisions, all of which carry a cost to the federal government, but with no one willing to suggest ways to pay for their proposals.

“If there is a message,” Salisbury noted, “it is that whatever the government is willing to spend on retirement in the future is less than they are now willing to spend.” Not that there isn’t interest in broader policy objectives, such as increasing the number of individuals covered by retirement programs; however, the sense is that the expense to the government of any new initiatives (such as “automatic”IRAs) would have to come from current tax preferences for other programs. “It’s less than a zero sum game,” Salisbury told the group.

Salisbury cited the comments made by Jim VandeHei, executive editor of Politico, at another recent event, who spoke of a dynamic of policy and party volatility in the near-term, with, at the extreme, control of at least one house of Congress changing every two years for the next decade. VandeHei noted that with the electorate so polarized, at the margins, he expects the presidential election in a number of states to be decided by extremely narrow margins, such as 1,000 to 4,000 votes. Moreover, because of the primary process, the extremes rule in both political parties. The resulting political polarization means that fiscal constraints dominate all discussions on Capitol Hill.

Salisbury noted that proposals to reduce Social Security, the sole source of retirement income for 37 percent of today’s retirees—or Medicare—will widen the current retirement savings gap, as will any reduction in retirement plan tax preferences, or that of workplace-based healthcare programs. “That diminishes an individual’s ability and/or willingness to retire—and that has an impact on employers, and workforce management,” he noted. That also means less capacity in the retired population to consume goods and services—a potentially critical factor in the nation’s future economic growth as well.

As we approach the end of 2012, there is potential for massive political and economic chaos, Salisbury said, because of the concurrent scheduled expiration of the Bush administration tax cuts, the impact of federal budget sequestration and its automatic spending cuts due to hit at year-end, the end of the (extended) payroll tax “holiday,” and the likely need to approve an increase in the nation’s debt ceiling shortly thereafter. The sense is that House Speaker John Boehner (R-OH) will have less control in the next Congress than the current one, assuming Republicans maintain the majority in that chamber. Meanwhile, in the Senate, regardless of which political party wins control, “60 is the new 50”—meaning that a super-majority of votes will be needed to break a filibuster and pass major legislation..

Salisbury suggested that “it’s all going to happen during the last breathing moments of the current Congress,” reflecting a sense that lame-duck members of the U.S. House and Senate – those who won’t be part of the next Congress - will be willing to cast otherwise politically risky votes in order to make something meaningful happen. The strategy: Let everything “hit the fan” on December 31, which would, among other things, restore higher tax rates. At that point, ANY change that reduces those “new” rates can be seen as a tax cut, rather than an increase. In effect, that means that the current Congress can vote for things on January 2 that would have been tagged a tax hike on December 31, but that on January 2 will be deemed a tax cut. This would all have to occur in the narrow window between the end of the calendar year and the start of the new 113^th Congress. Newly elected (but not yet seated) lawmakers avoid even having to vote, noted Salisbury. (Incidentally, the New York Times reported on a similar scenario this past week, a month behind Salisbury.)

Salisbury said that the highest probability for this outcome is if the status quo emerges from the 2012 election – the Senate split 50/50, the House remains in GOP control, and President Obama is reelected—“because all three will have a huge stake in things being solved, since they are going to have to live with it over the next four years.”

On the other hand, he noted, if there is a change in the balance of power—such that one party doesn’t have to live with the consequences of it, that the result can be blamed on the other party—lawmakers might defer action.

In any event, Salisbury noted that if the 2012 election produces the “status quo” in party alignments, that by early January, we will not only know what the Supreme Court has decided on healthcare, we may know what the tax status of workplace plans and programs like Social Security and Medicare, and then we can know what we’ll be dealing with. If action is deferred, there will be no letup from uncertainty.

“The macro, not the micro is driving policy,” Salisbury noted. “This is about saving the economy.” But with everybody focused on macro, he added, “HR execs will have to deal with the impact on the micro.” And, with trust in employers very high by both current workers and retirees,“individuals are likely to turn to employers even more than they do today to help them achieve health and financial security, including retirement security.”

- Nevin E. Adams, JD

Notes

(1) EBRI has run multiple simulations on these proposals, and their potential impact on retirement savings. See EBRI Notes, March 2012, “Modifying the Federal Tax Treatment of 401(k) PlanContributions: Projected Impact on Participant Account Balances;” EBRI Issue Brief #360, July 2011, “Employment-Based Health Benefitsand Taxation: Implications of Efforts to Reduce the Deficit and National Debt;”and EBRI Issue Brief #364, November 2011, “Tax Reform Options: Promoting Retirement Security.”

"After" Math

Last week, EBRI Research Director Jack VanDerhei testified[i]before the House Ways & Means Committee on the subject of “Tax Reform and Tax-Favored Retirement Accounts”, a hearing described as considering “…the current menu of options for retirement savings—both with respect to employer-based defined contribution plans and with respect to IRAs.” According to Committee Chairman David Camp (R-MI), the hearing was to “…explore whether, as part of comprehensive tax reform, various reform options could achieve the three goals of simplification, efficiency, and increasing retirement and financial security for American families.”

That hearing preceded by just a day Senate Budget Committee Chairman Kurt Conrad’s (D-North Dakota) unveiling of his Fiscal Commission Budget Plan (see link here). That plan[ii]referenced the original Bowles-Simpson Fiscal Commission’s “Illustrative” Tax Reform option under which the exclusion for employer-provided health insurance would be modified, capping its value for five years and then phasing it out over 20 years, while retirement savings accounts would be consolidated, with a cap on tax-preferred contributions.[iii] 

While the prospects for actual legislation ahead of the November election seem unlikely, it is clear that concerns about the nation’s budget deficit will keep tax reform—and the tax status of workplace benefit programs—front-and-center in the weeks and months to come.
Appropriately enough, next month EBRI will host its 70^th policy forum, titled "’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” At this semi-annual policy forum, panels of experts will deal with a variety of pertinent and timely issues, including the potential impact of changes to current tax incentives for employee benefits, and the “true cost” of tax deferrals. 
We’ll also talk about what 401(k)/defined contribution plans are delivering, and what individuals actually do after retirement with respect to their retirement savings, as well as optimal approaches on retirement income designs for defined contribution plans. We’ll even look around the globe for some potential lessons to be drawn from international comparisons.

It’s a day of information, interaction, and networking that you won’t want to miss.

However, seats are limited—reserve your place today. You can’t afford not to.

A copy of the full Policy Forum agenda, and registration information is online here.

- Nevin E. Adams, JD

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[i]A copy of Jack VanDerhei’s written testimony for the House Ways & Means Committee is available online here.

Video of the testimony is available in two sections, Part 1 and Part 2.

Additional information regarding the Ways & Means hearing is available online here.

[ii]See page 11, online here.

[iii]Last year an EBRI Notes article (July 2011, online here) analyzed the potential impact of those kind of changes on retirement savings.

Making a List

Believe it or not, PLANADVISER Magazine is five years old this year.

As such, we wanted to commemorate our fifth anniversary by recognizing as “legends” five individuals who had made a “significant personal impact to the retirement plan industry and the advisers who support it”.

Now, perhaps you think that would be easy—but I can promise you it’s harder than it looks. And over the past several weeks we have gone through our list—moving some off, bringing others on, and “sleeping on it” more nights than you might think.

First off, we limited the list to five individuals (for five years), and we also tried to focus in on the past five years. Limiting the list to five was hard enough (certainly once we got started), but trying to focus in on the period since we launched the magazine created an even more daunting task. Sure, it was “only” five years ago, but it’s amazing how much has happened during that time. That was the year the Pension Protection Act was signed into law, after all, not to mention the year that the first wave of revenue-sharing lawsuits was filed, and the year that the Securities and Exchange Commission (SEC), responding in the aftermath of the mutual fund trading scandal, introduced rule 22c-2. In fact, the cover story of the first issue of PLANADVISER was titled simply, “Now What?”.

When it came to compiling that list, however, while some names were, IMHO, obvious,
some were perhaps “too” obvious. There are those who have had an impact, albeit a controversial one, while others have arguably had an impact, but one that is softer, quieter, or perhaps simply not as pervasive as others.

The discipline of a finite list forces you to make tough choices, but it also inevitably leaves you wanting to create a list that is longer, and perhaps more inclusive, if only to give full recognition to the many professionals who have had—and continue to have—that “significant personal impact.” That said, we have chosen five individuals.

They come up in conversation with advisers all the time, and for good reason.
They are people we have watched and are watching—and people who bear watching in the years to come.

They are, quite simply, legends—and on Tuesday we’ll “introduce” them to you.

—Nevin E. Adams, JD

The PLANADVISER “legends” will be featured in the fifth anniversary issue of PLANADVISER and will be honored at our annual Awards for Excellence celebration in New York City on March 24. At that event, along with sister publication PLANSPONSOR, we will also be honoring our Retirement Plan Advisers and Adviser Teams of the Year, as well as our Plan Sponsors of the Year, as well as other retirement industry luminaries.

'Mandatory' Sentences

We have long lamented the reality that only about half of this nation’s workers have access to some kind of workplace-based retirement vehicle, and with good reason.

Well, we now have bills introduced in the Congress, both House and Senate, that will, eventually, require that every American business that hires 10 or more workers offer them the ability to save for retirement (see Auto-IRA Bill Introduced With Employer Mandates, Auto IRA Bill Introduced in the House).

Now, my first reaction was “it’s about time.” After all, we can talk about inadequate savings rates, inefficient asset-allocation decisions, and egregious revenue-sharing arrangements—but workers with access to the opportunity to save are surely better-served than those without. And any number of studies have shown that those without access to those programs save less—when they save at all—than those who have the opportunity to participate.

But honestly, the more I read through the bill1 summary (and that’s MUCH easier than the legislative language), the more I was struck by the potential complications. Workers, of course, can opt out—but under the legislation, employers are stuck with having to set the programs up.

Not that those workers will necessarily be saving much, nor is it likely to be “enough.” The default deferral rate will be 3%, with no escalation (though the worker can bump up the rate), nor is an employer match permitted. Workers have the choice of saving on a pre- or post-tax (Roth) basis, though the default is post-tax.

A default investment structure is outlined—basically, a principal preservation fund for balances under $5,000, with a lifecycle fund for larger balances—but the employer will still have to choose a provider, and could still wind up with fiduciary liability for that choice, unless the employer picks a provider on the approved list (from an online database that the government will establish). The bill summary suggests that an employer will fill in some basic information about its workforce, be provided with a list of suitable providers, click on one, and be connected2.

Moreover, there are eligibility standards to be monitored (those employed for at least three months and who have attained age 18 as of the beginning of the year), payroll deposit deadlines to be met (and an excise tax if they are not), a requirement to provide employees with some kind of standardized form explaining the program and investment decisions (though this could be part of the W-4), and a $100 excise tax per employee who is not properly covered by the program.

Oh—and to offset the costs of implementing and running this program, the employer will get a tax credit of…$250.

Will it Matter?

So, will this legislation live up to its promise? Will it provide 42 million more Americans with an “easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement”? The truth is, I’m not sure.

We can only hope that regulators are as attentive to the fees assessed on these accounts, and on the investment structures created—accounts that are sure to be miniscule on an individual basis, but which will almost certainly in their entirety be an enormous pile of temptation.3 As for its impact on participant savings—well, it is perhaps a step in the right direction, certainly in terms of getting those who have jobs to begin putting some of that income aside for retirement. Surely the additional incremental cost and burden to the employer won’t by itself be enough to dissuade a hiring decision—though in tandem with other mandates and the promise of higher taxes, to boot, it might well.

There is, of course, always the possibility that a realization that a retirement plan mandate is coming will spur those who have been holding off on setting up a 401(k) to do so now—though, IMHO, it’s every bit as likely, and perhaps more likely, that they will simply set aside those plans and wait for the “government’s” version (which, even with all its requirements and costs, is surely less onerous).

To their credit, those pushing the bills are trying to plug a retirement savings hole that has too long been ignored. There is every indication that they have been thoughtful in their analysis, and have sought to minimize both the cost and the effort imposed on businesses.

That said, there is a cost—in time, effort, and focus—attendant with setting these programs in place (and it feels like more than $250 worth to me). While, in better times, this might be a laudable initiative4, it strikes me as oddly inappropriate at a time when concerns about additional government mandates appear to be restraining hiring and business growth.

Timing, it is said, is everything. Unfortunately, I think this mandatory IRA bill may well be a good idea at a bad time—and that, IMHO, could make it a bad idea.

—Nevin E. Adams, JD

(1) For simplicity, this column focuses on the bill introduced in the Senate, which was the first to be introduced, though the two appear similar, if not identical.

(2) From the Bingaman bill summary: “The website will be designed to assist employers in choosing a provider. The employer will enter a small amount of information about itself and its employees in a starting screen. Then, employers will be directed to a page listing providers willing to serve as trustee for employees’ Automatic IRA accounts. Once the employer makes a choice, it will be directly connected to the provider.”

(3) The Bingaman bill summary explains the phased implementation approach not as an accommodation to employers, but so that retirement service providers can “prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.”

(4) The bill wouldn’t kick in for everyone right away: In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year); in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. So, perhaps by the time it is effective, the “timing” will be better. However, employers may well focus on the future implications when they make current hiring decisions.

"After" Thoughts

Last week, I attended a media briefing sponsored by BGI titled “Restoring Confidence: Saving the Future of Retirement.” That session featured insights from some new participant research, some perspectives about the current plan-trends landscape, some thoughts on annuitization in 401(k)s, and even some thoughts from a congressman who knows more than a little about pensions and 401(k)s.

Some random thoughts from, and stimulated by, that session:

• Research conducted by the Boston Research Group (BRG) (and sponsored by BGI) indicates that 33% of participants have put off looking at their statements because of the recent financial turmoil. I’m betting a like number never looks at their statements anyway.

• No news is actually bad news. Not only can participant statements provide some much needed motivation to do (more of) the right things, people might be surprised to see how well their accounts have held up.

• People have seen so many reports about how poorly indexes like the Dow and S&P 500 have performed that they probably overestimate their personal losses. Many, perhaps most, probably haven’t lost that much. Of course, some of those “too much in company stock” accounts may have fared worse.

• Data from the Employee Benefit Research Institute (EBRI) suggest that, in a “mere” two years, younger participants (who have smaller balances, on average) could be back to where they were last fall. It still feels like we’ve “lost” two years in three months—and most of that “recovery” is going to be funded from our own pockets.

• Disclosure is not (necessarily) clarity, and more disclosure is not (necessarily) more clarity. However, it beats the alternative.

• Two-thirds of participants in the BRG study who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased. No word on whether that confidence was justified or not.

• Nobody is in favor of conflicted advice—there remains, however, disagreement as to when that potential conflict actually creates bias, and whether that conflict can (ever) be sufficiently disclosed.

• During the discussion, Congressman Andrews referenced a recent GAO report that purports to show that “biased” advice actually yields poorer investment results than unbiased advice. However, that recent (March 2009) GAO report is actually a report about a not-so-recent (2005) SEC analysis of (just) 24 defined benefit pension consulting firms registered as investment advisers, (just) 13 of which allegedly “failed to disclose significant conflicts.” The GAO report cautioned that “[b]ecause many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between conflicts and lower rates of return….” However, that distinction is NOT being made by those (including Congressman Andrews) who want to rely on the GAO report as saying exactly that.

• Interestingly enough, the GAO report, while only 16 pages long, is nonetheless twice as long as the SEC analysis it was based on (see “IMHO: Disclose Sure?” ).

• According to the BRG research, among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Unfortunately, we don’t always have that option.

• Nearly half (45%) of all 1,000 participants surveyed said they would "save more” to replenish their 401(k) losses - though Warren Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year's Day, say they are going to go to the gym regularly.

• Nearly three-quarters (73%) of the BRG respondents said that "knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security" would boost their retirement confidence. What’s up with the remaining 27%? Or is it simply that “consistent, guaranteed” is not the same as “consistent, guaranteed, and ENOUGH?”

• “Knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of survey respondents. Doubtless the rest already have a sense that what they need and what they actually have are at variance.

• The BRG survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income. However, based on the (lack of) take-up rates in the real world, an acceptable source of “guaranteed monthly retirement income” wouldn’t appear to include an annuity.

• People confident about their retirement prospects behave differently (and generally, at least when it comes to saving for retirement, “better”) than those who aren’t. But are they more confident because they behave differently, or do they behave differently because they are more confident?

—Nevin E. Adams, JD

You can read the coverage of the session; Turmoil Dents Participant Confidence , Andrews: Dumping the 401(k) Would be a “Mistake”, Is the 401(k) Ready for Change? at http://www.plansponsor.com/pi_type11?RECORD_ID=45683.

Anything's Possible

I’ve spent most of my life, certainly my adult life, confident that Americans, certainly in large part, are reasonable and rational. I have not, unfortunately, always been as sure of certain subsets of the population, notably politicians.

On numerous occasions during the political season just past, as one outrageous claim after another was laid at the feet of one candidate or another (and sometimes both), I heard (and was heard to utter) “rebuttals” of a sort—“They’d NEVER do that,” for example, or at least, “They’d never get away with that.” Granted, sometimes I’d say those words—and yet wonder if, this time, “they” actually might. One’s position on such things is inevitably interwoven with one’s comfort with the idea, of course. “Anything’s possible” can be both an anthem of positive change and an ominous portent of doom.

Those were the kinds of reactions that last fall’s hearings on the impact of the markets on retirement engendered, certainly in terms of the reactions to comments made at those hearings, particularly those held by the House Education and Labor Committee. Hearings that included the perspectives of some who clearly see the 401(k) as a failure—and who seemed willing, if not anxious, to trade it in for a better model. Indeed, the notion that we’d not only impose a new Social Security-like tax on workers and employers to build a new solution—and fertilize it with the carcass of the 401(k) (or at least the carcass of the tax support for the 401(k))—drew a lot of (IMHO) well-deserved comment and criticism, including mine (see “IMHO: The Pit and the Pendulum”). In fact, “The Plot to Kill the 401(k)” was the December cover story of PLANSPONSOR.

Best, Worst Case

Despite those ominous portents, the Washington insiders I have discussed this with over the intervening months—nearly to a person—dismiss the notion. At worst, they view this as a bridge too far, even for the commanding majorities in Congress. At best, they simply don’t think this is what Congressman George Miller (D-California), Chairman of the House Education and Labor Committee, has in mind or would support.

That said, that same committee is getting ready to start up another wave of hearings (see “They’re Baaack….Hearings on Retirement Security, 401(k) Resurface” )—and, much as I would like to console my fears with those Washington-insider voices, I can’t quite get there.

Don’t get me wrong. When, in announcing the hearings, the Committee Web site speaks to “a series of hearings to explore the shortcomings of our nation’s retirement system and look at solutions,” I couldn’t be more supportive. By nearly any measure, many Americans aren’t saving enough on their own, most don’t have the support of a pension, and whatever fiscal integrity Social Security still enjoyed has surely been sacrificed in an era where the federal government claims to be providing tax “cuts” to workers who aren’t paying any kind of federal tax beyond that earmarked for Social Security (FICA). Nor, though I am an ardent supporter of the 401(k) system, do I see it as sufficient in every case to do the job (see “IMHO: ‘Broken’ Record”).

I keep thinking that maybe I’m being too sensitive—that I’m too willing to impugn the motives of folks who are genuinely trying to do something that I have long advocated needs doing: figuring out a solution to the “problem” of ensuring retirement security (see “IMHO: ‘Focus’ Group”). And yet, when I also read in the Ed/Labor Committee’s announcement that the “first hearing will examine how the current economic crisis has highlighted existing weaknesses in the 401(k) retirement savings system,” I can’t help but feel that at least some of this is about excoriating a valuable part of the solution, rather than crafting a more complete one.

Those reservations notwithstanding, I’m going to try to watch these hearings with an open mind—and I hope you will as well (to their credit, the Ed/Labor Committee has been very good about broadcasting these hearings on the Internet and archiving them for later viewing). For we surely need some alternatives not yet on the table—and, IMHO, we need to be attentive to preserving and enhancing the ones we currently do have.

Because, after all… anything’s possible.

—Nevin E. Adams, JD

Unbelieve Able

As my wife and I drove to pick up our eldest for the Thanksgiving break, I saw something I never thought I would see again: $1.95/gallon gasoline (even more incredible, that was while I was still in the borders of Connecticut, which imposes some of the highest gasoline taxes in the nation).

Indeed, what with the election, the introductions of the new Administration’s team, the bailout/rescue of the week, and the continued jitters of the world markets, the reality that gasoline costs about half what it did in July has gone almost unreported. Still, I heard a report last week that suggests the net impact of that drop in price has put about $500 billion back in American pockets—now THAT’S a “stimulus package” we can believe in!

Still, what I find interesting about that dramatic turnaround in oil prices is that it happened so rapidly that the explanations of why it ran up so quickly are still ringing in my ears. I remember all too well the pundits laying the price hikes off on the growth in the emerging industrial economies of China and India, the impact of hurricanes on production in the gulf, concern about turmoil in the Middle East, the perceived vulnerability of the shipping lanes....Others, of course, cited the fact that we hadn’t built a new refinery in more than a decade, and that we refuse to consider drilling in areas that wouldn’t seem to pose a threat to man nor beast. But what I remember most vividly was how consistently the so-called experts denied that “mere” speculation could account for these kinds of increases.

Yeah, right.

IMHO, one of the most frustrating things about the current economic crisis is that nobody seems to know what is causing it and, thus, no one can offer a credible idea of how long it will last or what can (or should) be done to hasten its end, much less what the “rest of us” are supposed to do in the “interim.”

While financial pundits are, these days, prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech—the resulting declines are generally not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system like the geological pressures that often result in earthquakes or the eruption of volcanoes. And, like those geophysical manifestations, there are often precursors to the actual “big event,” as well as significant after effects (nor do you have to be a financial genius to see them—how many times did you look at the soaring prices of homes in your neighborhood and think “this can’t go on?”). The problems at Freddie Mac and Fannie Mae that ostensibly triggered the most recent crisis were so blatantly obvious that even Congress felt compelled to hold hearings on the subject (and back in 2006, no less!).

At the outset of the current crisis, I was encouraged to see the federal government step forward to help and facilitate some—but not every—institution that appeared to be struggling. In hindsight, that may not have been as well-reasoned as one might want to believe, but at least there was the appearance of selective and intelligent, if not appropriate, involvement.

We want to believe that the so-called experts know what they’re doing. But with every passing day, it seems more and more obvious that they don’t. Little wonder, then, that the American electorate is increasingly disinclined to simply hand over a blank check. Little wonder also that some of the market’s “natural” remedies have apparently been staved off by people waiting to see how much the government would do—knowing full well that an outgoing Administration desperate for its legacy, and an incoming Administration anxious to prove itself would be more than somewhat inclined to do more than might otherwise be the case.

Retirement plan investors are consistently and, IMHO, prudently told to “stay the course” in times of turmoil; reminded that, even when change seems appropriate, even essential, to be careful about overreacting. It’s an approach that advisers, in large part, applaud and support.

Maybe it’s time the folks in Washington took a bit of THAT advice to heart.

- Nevin E. Adams, JD

The Pit and the Pendulum

They say that desperate times call for desperate measures. Well, of late, the markets have surely seemed desperate—and goodness knows, the response by regulators and lawmakers, certainly to this point, reeks of desperation, IMHO. We do seem, for the moment anyway, to be in something of a “pit” (and one, I must say, that the politicians seem to be trying to fill with money).

As if things weren’t complicated enough, we’re also in the waning weeks of what is perhaps the longest election cycle in history—one that, according to the pundits, will sweep the Democrats into a fuller, if not veto-proof, majority in Congress, if not the White House itself. If those trends hold, the pendulum would have continued its swing back—from the 2000 elections where the Republicans controlled all three, the 2004 elections where they solidified that hold, and the 2006 interim elections where Democrats regained their control of Congress. Such is the way of American politics.

Still, having spent some part of the last several years worrying about the establishment of a “you’re on your own-ership” society (see IMHO: Legs to Stand On , IMHO: Dead "Beat" ), I have been distressed to see a growing voice given to those who would treat the ills of the employer-based leg of the three-legged stool - by amputation.

Unwanted Attention

Those voices garnered some unwanted attention this month when the House Education and Labor Committee conducted a round of hearings on “The Impact of the Financial Crisis on Workers’ Retirement Security.” Unwanted attention in the form of headlines that read “House Democrats Contemplate Abolishing 401(k) Tax Breaks,” “Would Obama, Dems Kill 401(k) Plans?”, “Eyeing Your Pension: Are 401(k)s safe from congressional Democrats?”, and blog headlines that were even more provocative (“A 'Spread the Wealth' Plan for your 401k?”). Why, the word got out so fast that Congressman George Miller (D-California), who chaired the hearings in question, felt the need to reassure the media of his good intentions regarding the programs by issuing a background memo ahead of another hearing on Friday with the subject line “Background Memo on Preserving and Strengthening 401(k)s.”

What stirred things up was the testimony of Dr. Teresa Ghilarducci, who reiterated her previous advocacy for a “Guaranteed Retirement Account” (funded by a 5% of pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans. And, apparently in keeping with lawmakers’ current inclination to bailout various troubled constituencies, she also suggested allowing workers to “trade their 401(k) and 401(k)-type plan assets” for one of those Guaranteed Accounts—at mid-August prices, no less.

Of course, it’s one thing to make a proposal (Ghilarducci has gone so far as to write a book around hers; see IMHO: Conspiracy Theories ), or even to entertain the notion as part of a broader inquiry into considering ways to shore up the existing system. What got things stirred up were the intimations that Miller and Congressman Jim McDermott (D-Washington), chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, were actively considering the approach (1).

It doesn’t take much imagination to see where this kind of approach would take us. IMHO, it’s, at best, just a sneaky way to raise the Social Security tax from 12.7% of wages to 17.7% (and that’s not even counting the cost of the $600/worker the federal government would toss in). And that for an account that you couldn’t tap in a financial emergency, or leave to a spouse or children—because, despite the nomenclature, it wouldn’t be an “account” at all. On the other hand, you’d no longer have to worry about that saving for retirement plan—you’d just have to worry what new plans politicians might develop for your retirement “savings” (in her book, Gilharducci says that the financial risks are “borne by the government, not by the worker”—as though the government has a funding system independent of those workers).

Now, as I said before, these are difficult, extraordinary, even unprecedented times—and we find ourselves dealing with them smack dab in the middle of an election year. It is a time that cries out for bold action—and yet it is a time when even those with the best of intentions can do great harm.

The pendulum does, after all, swing back and forth. But if, god forbid, those pendulum swings wipe out the 401(k)—well, IMHO, that would really be the pits.

— Nevin E. Adams, JD

(1)Fueling concerns was the announcement that Argentina's leftist President Cristina Kirchner had signed a proposal nationalizing the country's private pension funds. The move, which is being challenged in the courts there, would transfer all the assets in individual accounts to the nation’s "pay as you go" system, even as it made future contributions to the state system mandatory. See “Argentina President Moves to Nationalize Pensions”

see also:

IMHO: Wonder Land

IMHO: Picture Perfect?

IMHO: “Diss” Ingenuous

IMHO: Vanishing Points?