Congress should permanently push back the age at which retirement savings account holders must take withdrawals, the head of the Investment Company Institute testified last week.
"To help retirees manage their assets more effectively, we should relax the rules on required minimum distributions," said Paul Schott Stevens, president and chief executive of the Washington-based ICI. He testified before the House Education and Labor Committee, which held a hearing Feb. 24 on retirement security.
The age for required distributions was set at 701/2 in 1962, but life expectancy has increased "markedly" since then, Mr. Stevens told the committee. The amount that must be withdrawn is based on a formula determined annually by the Internal Revenue Service, based on life expectancy estimates.
ICI research shows that many retirees do not begin to take distributions until they must, in order to avoid paying steep penalties, Mr. Stevens said. They are in a position to manage their assets for a longer period of time, he said.
Required minimum distributions were suspended for the 2009 tax year in the Worker, Retiree and Employer Recovery Act of 2008 as a way of helping retirees cope with the market downturn.
The rules were originally put in place to ensure that retirees do not use their accounts as estate planning tools, said Alicia Munnell, a professor of management sciences at Boston College in Chestnut Hill, Mass., and director of the college's Center for Retirement Research. "Perhaps we can make the age later, but I think that it would require careful study, and you definitely would want some age" at which distributions are required, she said.
The concern about locking in losses because of ill-timed distributions may be exaggerated, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. Only a small percentage of the retirement funds must be withdrawn every year, he said. Mr. Baker did not address penalties for withdrawals.
"I think you'd find very few people who have reached the age of 70 who are invested 100% in equities," he said. Most could meet the distribution requirement by cashing out bonds or money funds, he said.
"The current economic crisis has exposed deep flaws in our nation's retirement system," House Education and Labor Committee Chairman George Miller, D-Calif., said during the hearing.
Since the beginning of the crisis, trillions of dollars have evaporated from workers' 401(k) accounts and the decline has forced many workers to postpone retirement or rejoin the work force, he said.
"For too many Americans, 401(k) plans have become little more than a high-stakes crapshoot. If you don't take your retirement savings out of the market before the crash, you are likely to take years to recoup your losses, if at all," Mr. Miller said.
'HOLLOW PROMISE'
Wall Street's guarantee of predictable benefits "was nothing more than a hollow promise," he said. While 401(k) plans were intended to supplement defined benefit pensions and Social Security, more than two-thirds of workers with retirement plans have 401(k) plans for their primary, or sole, savings vehicle.
"These plans in their current form do not and will not provide sufficient retirement security for the majority of Americans," Mr. Miller said. He called for hidden fees and conflicts of interest to be "rooted out" of the plans.
In the last Congress, Mr. Miller sponsored legislation aimed at im-proving fee and conflict-of-interest disclosures, which he plans to reintroduce this year.
But disclosures must be meaningful, Rep. Howard P. "Buck" McKeon, R-Calif., the ranking minority member of the committee, said at the hearing. While he said he welcomed improvements in fee disclosure, "I would caution, however, that we not suggest that investment fees are to blame for the dramatic declines in retirement savings."
The ideal system for retirement savings is a single defined contribution plan, consolidating all different types of retirement savings plans, including individual retirement plans, and open to everyone, John Bogle, founder of
The Vanguard Group of Malvern, Pa., told the committee.
It would be dominated by low-cost providers focused on index funds, overseen by a newly created federal retirement board that would establish principles for asset allocation and investment risk, and ensure full disclosure of all plan costs, including transaction costs, he said.
Mr. Bogle also called for including mandatory, low-cost annuity plans in retirement accounts so that people cannot outlive their assets.
"We need a federal standard of fiduciary duty for all money managers who are agents, who in my opinion have failed abjectly in their responsibility to serve first the interests of their principals, mutual fund shareholders," he said. "These agents bear a heavy responsibility for the financial crisis we are now facing," Mr. Bogle said.
E-mail Sara Hansard at [email protected].
