Recalling 'Pension Destruction Act,' and Introducing Obama Retirement Bond

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