Compliance

House Committee Advised not to Scare Participants

February 24, 2009 (PLANSPONSOR.com) - While individuals speaking during the U.S. House Education and Labor Committee's hearing on "Strengthening Worker Retirement Security" described the nation's retirement system as being "in peril," lawmakers were warned not to frighten participants away from it.

By Rebecca Moore | February 24, 2009
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A statement from Representative Howard P. "Buck" McKeon (R-California) said Republicans on the panel have welcomed the examination (see They're Baaack….Hearings on Retirement Security, 401(k) Resurface ) but caution that the economic crisis must not be used to foist a new, government-run retirement system on American workers, and that Congress must be cautious not to undermine confidence in America's retirement savings infrastructure, which could scare workers out of the system.

"While our defined contribution system could be improved, it would be a real mistake to dismantle it, or nationalize it, as has been suggested in this Committee in the past," said McKeon. "We have a heavy responsibility in both the legislation we pass and in the debates we undertake. In particular, I would make clear that now is not the time to frighten people out of the market. Triggering a widespread exodus from the system would only exacerbate the market's downward trend, while cementing these deep losses."

Paul Schott Stevens, President and CEO of the Investment Company Institute, also warned that Congress should not act in a way that could eventually harm workers in the long run. "[T]his is not the time to abandon ship, either on the 401(k) system or long-term investing generally. We do not know how long this current downturn will last, but history tells us that participants who cash out of the market now will lock in their losses and find it impossible to time their return so as to share fully in the market recovery," Stevens said. He noted that working Americans support the 401(k) system and do not think it needs an extreme makeover.

Retirement System in Peril

However, witnesses recognized that the economic collapse has uncovered problems in our nation's retirement systems that must be addressed.

"The events of the last two years shown how exposed workers' retirement income is to market risk," said Dean Baker, co-director of the Center for Economic and Policy Research, according to a statement on the Committee's Web site. "The collapse of the housing bubble has called attention to the fact that the value of not only their pensions, but also their homes, fluctuate with the market, while their homes are an even more important asset for most workers."

Alicia Munnell, director of the Center for Retirement Research at Boston University, pointed out that 401(k) plans have become the primary source of retirement for most workers, and they were not designed to be. "Evidence indicates that people make mistakes at every step along the way. They don't join the plan; they don't contribute enough; they don't diversify their holdings; they over invest in company stock; they take out money when they switch jobs; and they don't annuitize at retirement," she said, according to the statement.

The McKeon statement said Republicans will continue to focus on reforming and strengthening the private sector-based retirement system, making it easier for workers to save, and encouraging employers to participate in the system.

Meanwhile, Committee Chairman Representative George Miller (D-California) said: "As we work to preserve and strengthen 401(k)s and the other legs of the retirement savings stool, we must also tackle these difficult questions about the state of our nation's retirement system as a whole and look to see whether we need to create a retirement system that works for all Americans, not just the fortunate few."

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