Congress mulls major 401(k) changes

A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans. Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans. This was suggested by the chairman of the House Committee on Education and Labor. “With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said. “We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings. With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said. Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York. When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan. “The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said. That simply results in transferring money from taxed savings accounts to untaxed accounts, she said. “If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said. Rep. Robert Andrews, D-N.J., raised the issue of which investment advisers are allowed to offer workers investment advice. The Department of Labor is considering “loopholes” that would allow advisers to offer “conflicted investment advice if the advisers work for subsidiaries of financial services companies that sell the investments,” he said. With American workers facing $2 trillion in losses from retirement plans over the past year and Democrats expected to gain seats in the House and the Senate, actions being contemplated by the committee are an important harbinger of what could come out of Congress next year.