For those advisors involved with retirement planning, and advising on retirement plans, be aware of new scrutiny from the Department of Labor and the IRS, and get up to speed on a new retirement income vehicle gaining traction in the Obama Administration, says John Carl, president of the New York-based consulting and training firm, the Retirement Center, and executive director of the PlanSponsor Institute.
Carl (left) detailed for the 120 advisor attendees of the third annual Retirement Income Symposium (RIS), sponsored by Summit Business Media’s Investment Advisory Group, those issues, and also provided a bit of history on the current and most recent Presidential Administrations’ retirement planning approaches. Carl’s bottom line: “There’s still just not enough savings going on for retirement,” so something will have to be done.
The Pension Protection Act of the George W. Bush Administration is “perhaps the most ironically named piece of legislation every to come out of Washington,” said Carl, “since the effect was for many [defined benefit] plans to be terminated or frozen.” Speaking Nov. 8 at the RIS in Chicago, Carl said tongue-in-cheek that the PPA might have been more accurately named the “Pension Destruction Act,” since that’s what happened, citing many DB plans’ demise of frozen state.
Turning to defined contribution plans, Carl noted that one of the “major problems for Americans retiring with a defined contribution basis is that a DC system is voluntary,” Carl said. “That’s a problem,” he said, because “even if you’re lucky enough” to work for an organization that has a DC plan, even one that “gives you free money in the form of a match,” about a third of DC plan participants “still say ‘No, thanks’ to free money.” The problem, he forecasts, is not simply for that non-participant, but “20 to 30 years from now,” there will be a problem for the country when those people look to retire and they have no money of their own.
Recognizing this, Carl said the Bush Administration’s PPA attempted to address the participation, and as an incentive, “they offered auto-enrollment into a qualified default investment alternative (QDIA),” with the default options being target-date mutual funds, managed accounts, or balanced funds.
Since, he said “the easiest way to enroll people was into target-date funds, because all you need to know is the participant’s age,” that’s why so much money in DC plans flowed into target-date funds. The trend was helped along by plan sponsors’ worries about litigation down the road—“among retirement plan consultants, we always say you have to be prepared”—if the other QDIAs did not perform to plan participants’ expectations.
However, the unexpectedly poor performance of target-date funds in 2008 led to much recrimination in Washington, including a rowdy Senate Special Committee on Aging hearing. Carl said that it was discovered that target-date funds designed for people retiring in 2010, for instance, “were all different” in terms of their holdings. Moreover, those funds were being “managed for somebody retiring in 2010 but who might very well live another 20 to 30 years, so the equity allocation was higher.”
(John Sullivan of AdvisorOne reported on a spirited defense of target-date funds at the RIS by Wyatt Lee of T. Rowe Price.)
That “discovery” led to a Department of Labor-SEC joint task force looking at whether those funds were “prudently selected” by plan sponsors, particularly since the great majority of target-date money was gathered in by one of three fund companies: T. Rowe Price, Vanguard, and Fidelity. That led the task force to decide that “maybe it makes sense to have
several different types of qualified defaults. That’s one thing being driven by Washington.” (See Melanie Waddell of AdvisorOne’s report on the task force’s recommendation.)
What’s Next Inside the Beltway
Carl then went on to talk about a fiduciary standard, prospects for new retirement-related legislation, and gave some hints on what the Obama Administration likes in the way of retirement planning steps.
Saying that in the retirement consulting business the “’F’ word these days is ‘fiduciary’,” Carl asked how many of the attendees wanted to be a fiduciary, and only a few hands were raised (in an RIS session on Nov. 9 led by Blaine Aikin of Fiduciary360, most of the hands were raised when Aikin asked “How many of you are fiduciaries?” leading Aikin to note the disparity). Noting that “there’s a comment period now on expanding the definition and role of a fiduciary,” Carl reminded the advisors that “anyone who touches a qualified retirement plan is a fiduciary.”
Despite the outcome of the midterm elections that will make Republicans the majority in the House of Representatives in January, “I doubt we’ll see any retirement legislation in the new Congress,” said Carl, suggesting, however, that “regulation is another story,” reporting that the Department of Labor “added 997 people to its headcount in 2009;” most of whom will be working in enforcement and auditing retirement plans and their advisors.
He sounded a warning on another government agency responsible in part for retirement planning, saying “the IRS is focusing on audits in the 403(b) space, looking to provide “education and guidance” on retirement plans for those schools, hospitals and other not-for-profits offering those plans.
As for what to look for from the Obama Administration on retirement planning, Carl mentioned the Middle Class Task Force led by Vice President Joe Biden, which will look into retirement, and the Administration’s interest in a new type of retirement-savings vehicle called “R bonds.”
Already in hearings, recalls Carl, the R-bond concept was floated by Mark Iwry of the Treasury Department. While Iwry was at the Brookings Institution, Carl said, he wrote a paper on the R bond, a “government guaranteed lifetime income bond.” An individual would buy the bond from the government, Carl explained, with the proceeds going to the Treasury, which would then “pay out a lifetime income.” Carl drew more laughs when he asked rhetorically whether that plan “Sounds like any other program?,” noting the “great job has the government done with Social Security.” However, said Carl, the R bond approach “might be okay for some people,” especially those without any other retirement income plan.
Damning with faint praise, Carl said that the folks floating this idea in the Obama Administration “are good-hearted people, but with a much different approach than the prior Administration,” noting that “they think government is cool,” prompting more laughter from the attendees.
He concluded with a call for advisors to get involved in Washington’s scrutiny of retirement planning. “If there ever was a time for you to be reaching out to your representatives on these issues,” Carl counseled, “now’s the time.”