Compliance April 7, 2009

Andrews: Dumping the 401(k) Would be a “Mistake″

A leading Congressman on pension issues said today that it would be a “mistake″ to do away with the defined contribution system.
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Speaking at an event sponsored by Barclays Global Investors (BGI) in New York today, U.S. Congressman Rob Andrews (D-New Jersey) said that the real problem today is a lack of confidence in the economy, and that it would be “a mistake to confuse a loss of confidence in the economy with a loss of confidence in the 401(k) system.’
Acknowledging that there were voices in Washington who felt differently on the issue, Andrews said that the best thing that could be done to help the 401(k) system was to “fix the economy,’ and that he believed President Obama had taken steps to do just that.
He did, however, acknowledge that the current 401(k) system could be improved, citing four areas in which he said he has, and would continue to, press for change:
(1) Qualified independent investment advice
Andrews noted that most individuals are not capable of making and keeping up with complex investment decisions, and that they needed the help of professionals to do so. He noted that the Pension Protection Act (PPA) provided a roadmap to help provide those services, but that the Department of Labor’s recent regulations on advice had gone “well beyond’ what he thought the law called for. As a consequence, he predicted there would be a “battle royale’ on the subject, but said he was confident that a resolution on the issue would be forthcoming. His notion–and one that he said was supported by current law–is that if a plan sponsor exercises appropriate due diligence in selecting an adviser, they shouldn’t be able to be sued for doing so.
(2) Unbundled fee disclosure
Andrews said that Americans do a good job of comparison shopping when they have the information they need to make those decisions. “We need to build smart shoppers’ when it comes to retirement plans, he said, citing his support for recent legislation introduced by U.S. Congressman George Miller (D-California), who chairs the House Labor and Education Committee on which Andrews is also a member.
(3) Provide a more conservative fixed income option
Andrews said that while he didn’t want to mandate fund choices, or impede worker’s ability to make personal investment decisions, he did believe in giving “every DC participant the ability to covnert to a DB-type plan.’ In essence, the availability of some kind of annuitization option within, or attached to, the DC plan as an investment option.
(4) Expand access
Andrews said that he–and the Obama Administration–want to expand the kind of program benefits that are today enjoyed by 401(k) plan participants to the 71 million working Americans who today do not have access to such a program. He acknowledged that there are details to be fleshed out–how the program would be administered, and by whom, who would invest the contributions–but that the program design contemplates an automatic enrollment for every worker not already covered by a workplace savings plan into this new program. He said that care would have to be taken so that this program was “not as generous’ as the current private system model so that employers with existing plans wouldn’t abandon them for the government alterative.
He also pointed to this so-called “automatic IRA’ proposal, as “evidence of the belief’ in the advantages of the private sector solution by both he and the Obama Administration.
After his presentation, Andrews was asked if he thought the existing rules on Qualified Default Investment Alternatives (QDIA) would be modified to provide for a money market solution, or perhaps a stable value choice. Noting that it was an issue that had already received “a lot of attention,’ Andrews said he didn’t think a change was likely to come soon. “It had a tortuous approval process initially,’ he noted, “and the thinking seems to be that we need to give the current approach a chance to work.’
Data & Research April 7, 2009

Turmoil Dents Participant Confidence

It should come as no surprise to discover that nearly two-thirds of surveyed participants say their retirement confidence has declined in the past twelve months.
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Indeed, half of surveyed participants said that the recent financial turmoil has “caused me to think a lot more about my retirement income,’ according to a new study sponsored by Barclays Global Investors (BGI), and conducted by Boston Research Group.
However, the online study, “401(k) Participant Attitudes, Behavior, and Intentions,” based on the results of a survey conducted in March 2009 by The Boston Research Group that included the perspectives of a thousand current 401(k) plan participants, found that the greatest impact on retirement confidence was among participants who were already concerned about their prospects. In fact, two-thirds of participants who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased.
On the other hand, among those who were already “worried I’ll never be able to retire,” 85% said that that level of “confidence” had decreased and only 13% said it was unchanged, while 83% of those who previously had said they were “not so sure how” they would make ends meet in retirement said they were now even less confident (14% said that was unchanged). However, among those who had been “somewhat confident,” 57% said that confidence had declined, compared with 38% who said their confidence level was unchanged (5% said they were now more confident). The study made no attempt to correlate participant confidence with their actual level of savings and/or preparation.
“Horror Movie”
That declining confidence has apparently had an impact on participants’ willingness to look at their statement, with 33% saying that they had put off looking at those reports. Once again, the confidence level played a role in what Boston Research Group founder Warren Cormier called the “horror movie” syndrome, which he described as a situation where participants effectively covered their eyes, and only snuck a peek at their statements through their fingers if they anticipated bad news. Nearly half of the “worried I’ll never be able to retire” group said they had put off looking at those statements–and even more than one-in-five (22%) of the confident group had done so as well.
That trend has additional negative implications Cormier told attendees at a BGI event in New York today, noting that participant statements are one of the most critical means not only of getting participants’ attentions, but also motivating them to take action. “We know behaviorally that lack of communication tends to significantly raise fear,” he said.
Asked how they planned to recover from their retirement plan losses, nearly half (45%) of all 1,000 participants surveyed said they would “save more,” though Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year’s Day say they are going to go to the gym regularly. Still, even 26% of those in the most concerned group said this was their alternative, as did 55% of the most confident group.
Plan “Bs”?
Among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Nearly as many (19%) simply said they “have no idea” as to how to make up the losses. Just over one in four (26%) planned to make “better” investment choices, while 17% indicated they would invest more aggressively and 14% planned to invest more conservatively.
As for how that declining confidence is impacting the perceived value of their 401(k) plan as an employee benefit, 31% said they “highly” valued the benefit, and 52% said it was “valued.” More than half of those who were in the most confident group “highly valued” the program, while 21% in the least confident group rated it that highly. Regardless of confidence level, Cormier said they saw “no evidence” of any interest by participants in discarding the 401(k). In fact, asked to contemplate the impact of the recent financial turmoil, 46% said that their workplace savings plan was more important, and a matching number said it was just as important. Only 8% said it had declined in importance.
“Guaranteed” Results

 

Not surprisingly in view of the recent turmoil, surveyed participants did evidence an interest in guarantees, specifically as a means to shore up their retirement confidence. Nearly three-quarters (73%) said that “knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security” would have that affect (you have to wonder about the other 26%), a sentiment that was consistent across the confidence spectrum (64% of the most confident group, 83% of the least confident). “Knowing my health care costs would be covered” improved the confidence of 73% of the total group (60% of the most confident, 87% of the least confident), but “knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of the group (ironically, just 56% of the most confident group agreed with this position, compared with 67% of the least confident group – suggesting some softness in the confidence levels).
Asked to name the “one thing” they would change about their 401(k) plan, nearly half (49%) of the entire participant group cited “providing a choice for securing guaranteed income in retirement” – the number one option, according to Cormier. However, that option was considerably more important to the least confident group (61%) than the most confident group (22%). The most popular option among the most confident group was “providing more investment choices, cited by 40%, while just 15% of the least confident group embraced that as a valued change. The survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income – and little wonder, since nearly as many (87%) said they didn’t believe Social Security alone would provide a sufficient level.

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