The middle class is “under siege” from unemployment, mounting debt and home values that have yet to recover, Marcia Wagner, managing director of the Wagner Law Group, said Monday at the IMCA conference.
The Obama administration has recognized its need to “buttress” the middle class to protect their retirement and is making efforts to incentivize savings and improve returns, she said.
“Given the power of inertia, policymakers are betting big,” she said. Some strategies like automatic enrollment are already in place, but while utilization is growing, deferral rates are holding tight around 3%. Furthermore, those policies are usually used for new hires. Sponsors should examine adopting re-enrollment and reallocation strategies to include older employees who have old election rates, she said.
There’s also a “heavy emphasis on automatic IRAs,” Wagner said. These would rely on “R-bonds,” which Wagner described as “a new type of government debt just for automatic IRAs.” These types of plans typically have a 3% default contribution rate and use a Roth structure, and default investments are designated by the government.
Republicans and Democrats alike are unhappy with some aspects of automatic IRAs, Wagner said. Broadly speaking, many Republicans find the mandate unconstitutional, while Democrats dislike how much money would be funneled to Wall Street, Wagner said.
Whatever plans end up looking like, Wagner said “automation is the nomenclature of the day.”
Both the Bush and Obama administrations have put an emphasis on returns by focusing on transparency and fees, Wagner said. Fiduciary “means philosophically to make participants educated consumers,” she said. Recent disclosure rules like 408(b)2 and 404(a)5 do just that. Wagner joked that most advisors might think disclosures go straight to the “circular file,” but she said that “there is a minority of participants and sponsors who read disclosures.” Competitors are reading them too, and even if that results in only minor changes to fees, they can have a big impact on participants later on.
Wagner added that fiduciary proposals are “evolving and harmonizing between and amongst the DOL, SEC and FINRA.”
One example of the ways government is trying to “buttress” retirement outcomes is in focusing on decumulation as much as accumulation. “The government is trying to get people to think in terms of annuities,” Wagner said. “They’re eliminating the regulatory underbrush inhibiting getting annuities on the lineup” of ways to take distributions.
A proposal from the IRS calls for use of a longevity annuity, which is really just a deferred annuity, Wagner said. It begins paying after the expiration of the owner’s mortality table, so it provides income for later in life. It would provide an exception to required minimum distribution rules for longevity annuity investment.
Wagner noted that target-date funds didn’t take off until they became the preferred qualified default investment alternative. If annuities became the default of choice, though, she said it would “kill the QDIA market.” Doing so would require a change to the Department of Labor’s Interpretive Bulletin 96-1, which lays out the difference between education and guidance. “People aren’t going to want to become fiduciaries to talk about annuities,” Wagner said. Wagner also talked about the DOL’s proposal for lifetime income disclosures. The proposal requires a quarterly statement of projected monthly income assuming a 7% return and 3% annual contribution increase, and using a 3% discount rate to convert future dollars into current dollars.