In February, the U.S. Treasury and Labor departments jointly announced they were seeking public comment on proposed design changes to employer-sponsored 401(k) plans and individual retirement accounts that would centralize the private pension system under structures created and administered by the government.
Supporters say these changes are needed to ensure Americans save more for their retirement and have lifetime income options that prevent them from outliving their retirement savings, protecting them from market risk.
At stake for the millions of Americans with private retirement plans: Would they be able to continue making their own investment decisions? Or would Congress mandate both investment options and distribution methods? Government Retirement Accounts also would prevent workers from owning their retirement savings fully, as they could bequeath only half of their remaining account balances to their heirs.
Government officials, labor unions, and some industry groups favor GRAs and mandatory annuitization. Under the proposal being discussed, workers and companies alike would contribute a minimum of 2.5 percent of pay, up to the Social Security earnings cap, to their GRA. In return, workers would be guaranteed a 3 percent return on their investment. This system would not replace Social Security, forcing workers to contribute to both systems.
According to the Department of Labor, 61 percent of all private-sector workers and 71 percent of all full-time private-sector workers had access to an employer-provided retirement plan in 2008, and another 47 million households currently participate in IRAs. Proponents of a government takeover of the private pension system say the housing and financial crises have jeopardized retirement security and left Americans less trusting of the financial system.
However, a survey conducted in fall 2008, even as the financial crisis was unfolding, found strong support for the current system. The Investment Company Institute, a national association of U.S. investment companies that manage about 50 percent of the nation’s 401(k), 403(b), and IRA assets, surveyed 3,000 households and reported nearly nine of 10 rejected the idea that government, not individuals, should make retirement investment decisions. Even households without a 401(k) or IRA did not see a need for drastic changes to the private system.
Effect on private wealth
Government officials vociferously deny any intent to eliminate 401(k) or IRA investments in favor of a government-run system. Joseph Dewolk, a spokesperson for the U.S. Department of Labor, told Carolina Journal it’s inaccurate to say they’re looking to convert IRAs or 401(k)s to a government-run plan. “I would refer you to the ‘Request for Information’ because it’s just that, a series of questions to gather input from the public and others about our proposed rules. It’s about making sure Americans can make their savings last.”
The “Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans,” posted to the Federal Register in February, was open for public comments until May 3 (see EBSA-2010.pdf). So how do Americans find out when an issue is up for public comment?
When questioned about the transparency of the public comment system, Dewolk said, “Well, a lot of people did know, and they commented on the website.” Sandra Salstrom, a spokeswoman for the Department of Treasury, told CJ that “it’s [the Request for Information] is on the Federal Register so anyone can read it and comment. Apparently, 700 people cared enough to make a comment.”
As CJ first reported in November 2008, the House Committee on Education and Labor has held several hearings since early 2008 on strengthening pensions. Teresa Ghilarducci, professor of economic policy analysis at the New School of Social Research in New York, is among those advocating Congress to remove favorable tax treatment for 401(k)s, which opponents say essentially would eliminate any reason for companies to offer these plans, and instead offer GRAs.
In a statement to the committee on Feb. 24, 2009, John Bogle, founder and former CEO of The Vanguard Group, pushed for a new defined contribution plan in the private sector but overseen by a new independent Federal Retirement Board. “If we want to encourage and maximize the retirement savings of our citizens, we must drive the money changers — or at least most of them — out of the temples of finance.”
But others, including Paul Stevens, president and CEO of Investment Company Institute, said the government should “not favor one solution over others, but should nurture a robust and transparent market where innovative products can be developed and understood by retirees.” (Details of testimony are here.)
Two reports referenced in recent Committee hearings and the U.S. Labor and Treasury departments’ joint RFI discussed government-run options. The Annual Report of the White House Task Force on the Middle Class, released in February, strongly favors automatic IRAs, annuitization, and GRAs (see Annual-report-middle-class.pdf). A July 2009 Government Accountability Office report on private pensions prepared for the House committee details the advantages and trade-offs of alternative retirement options currently under consideration (see GAO-09-642.pdf).
One option would be the Universal 401(k) Plan giving every worker, including part-time employees and recent hires not yet eligible for an employer-sponsored plan, access to a government-administered defined contribution retirement savings account. Workers would be enrolled automatically unless they opted out.
The Guaranteed Retirement Accounts plan proposes a mandatory system with both defined benefit and defined contribution features. The report makes it clear in footnote 79 that this system would work only if everyone has to participate: “A mandatory retirement system cannot ensure 100 percent coverage if certain groups, such as very low-income workers, are exempt from the mandate.”
The report also warns that requiring workers and employers to contribute to any type of pension plan would increase the costs and divert funds from other uses, such as employers’ business expenses and workers’ basic necessities. Under such a scenario, employers might have to reduce compensation to employees, disproportionately affecting lower-income workers and small businesses.
An annuity is the investment vehicle most favored by many government officials. However, the GAO report says that forced annuitization is problematic because annuitants who die early in their retirement would not realize much benefit, they would no longer have access to their assets in the event of an emergency, and generally could not leave a bequest to their heirs.
Finally, the report concludes that any centralization or nationalization of the private pension system, especially one that guaranteed a rate of return, “may be a costly and complex effort that requires new regulatory and oversight efforts. These costs could be passed on to workers, employers, and taxpayers in general.”
Opposition to government-run plans
In a letter sent to the Department of Labor and Department of the Treasury, Republicans expressed strong opposition to any attempt to eliminate or federalize private-sector IRAs or 401(k)s. Alexa Marrero, spokesperson for Republican members of the House Education and Labor Committee, told CJ that, while she’s unaware of any specific timeline, the administration’s lack of transparency on previous issues makes it possible it could act at any time without providing much notice.
Public comments to the RFI from those who were not connected to labor advocacy groups or the investment community largely were negative. While some said improvements could be made to the current system, many expressed distrust of the government’s ability to manage retirement systems and said individuals should make their own decisions.
Karen McMahan is a contributor to Carolina Journal.