Lawmaker: Independent advice may bolster 401(k) plans
Roughly $2 trillion in assets have been sucked out of 401(k) plans in the last year, prompting scores of individual investors to lose faith in what's become the primary retirement vehicle for millions of Americans.
Roughly $2 trillion in assets have been sucked out of 401(k) plans in the last year, prompting scores of individual investors to lose faith in what’s become the primary retirement vehicle for millions of Americans.
Yet now a key lawmaker in-volved in setting retirement policy — Rep. Robert Andrews, D-N.J. — is angling to strengthen the 401(k) system by providing individual in-vestors with increased access to independent investment advice.
He’s also looking to motivate employers to add more conservative investment options that could help participants generate streams of guaranteed lifetime income.
Mr. Andrews, speaking at a re-tirement seminar in New York last week, asserted that despite the massive losses that investors have suffered, the 401(k) system itself is not broken.
Rather, it just needs some minor — yet immediate — tweaks to empower individual investors, added Mr. Andrews, who is also the chairman of the House Subcommittee on Health, Employment Labor and Pensions.
“I don’t think we should confuse a lack of confidence in the economy with a lack of confidence in the [401(k)] system,” said Mr. Andrews regarding the notion that the 401(k) system needs an overhaul to prevent workers from sustaining massive losses in their retirement accounts.
Rather than pursue extreme changes to the system, he said, he plans to push an agenda through Congress this year that will strengthen existing 401(k) plans in their most critical areas of need.
At the top of Mr. Andrews’ list: encouraging employers to bring in independent financial advisers to help 401(k) participants make key decisions about investing — and withdrawing — their retirement assets.
In a 401(k) system, individual plan participants essentially are asked to act as their own “pension board of trustees,” he said.
“Yet most of us are woefully equipped to do this,” Mr. Andrews said at the seminar, which was hosted by Barclays Global Investors of San Francisco.
The Pension Protection Act of 2006 paved the way for companies to hire independent investment advisers who can assist 401(k) plan participants in managing their employer-sponsored retirement accounts.
Yet the true definition of an independent, “conflict-free” adviser has still not been settled, Mr. Andrews noted — a factor that could be keeping many employers from tapping the investment advisory community to work directly with 401(k) participants.
Aside from providing some clarity on this issue, he stated that he’ll also move to convince employers to include additional “conservative” investment vehicles on their 401(k) platforms — specifically suggesting that annuities may need to play a larger role in individuals’ retirement savings.
Most 401(k) plans do not offer any lifetime-income options, said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute in Washington, who estimates that roughly 20% of employers directly provide annuity products to their plan participants. “And even in those cases, most participants don’t use them,” he said at the seminar.
But that could change quickly.
BGI, along with Boston Research Group of Hopkinton, Mass., surveyed more than 1,000 401(k) participants last month and found that 73% would feel more confident about their ability to retire if they had a source of guaranteed monthly income in addition to Social Security. At the same time, nearly half of these participants said that if there were one thing they could change about their 401(k) plan, it would be to add a guaranteed-income strategy.
Typically, individuals have shied away from annuities in their 401(k) plans because they carry high fees — or they simply do not understand these types of products, noted William Gale, director of the Retirement Security Project at The Brookings Institution in Washington.
“It’s also not intuitive, because it’s asking people to hand over all of this money that they’ve saved for years in exchange for a significantly smaller monthly payment,” Mr. Gale said. “There’s always been this all-or-nothing thought about annuities.”
To that end, Mr. Gale suggested that lawmakers might need to consider introducing policies that would make it easier — and perhaps less costly — for 401(k) participants to access annuity options.
He proposed one concept — a “trial income” — that would default a portion of a participant’s 401(k) balance into a monthly-income vehicle for two years. Workers could opt out of this trial, Mr. Gale noted, but it would give participants the ability to gain a better understanding of annuities and determine independently if they’re comfortable with these types of products.
At the same time, by extending this to every participant in a 401(k) plan, he said, employers could obtain better institutional prices on annuity offerings.
E-mail Mark Bruno at [email protected].
Learn more about reprints and licensing for this article.
