Congress Considers Market Impact on Retirement Security

October 7, 2008 ( - While participants (and plan sponsors) nervously contemplated the impact of the market tumult on their retirement savings, Congress held a hearing on the subject.

Aptly titled “The Impact of the Financial Crisis on Workers’ Retirement Security”, the hearing, convened by the U.S. House Committee on Education and Labor, included testimony from a number of experts.   Committee Chairman George Miller (D-California) linked the decision to have the hearing to Speaker of the House Nancy Pelosi’s announcement following the passage of the $700 billion financial services bill that there would be a “series of hearings” to investigate the causes of the current financial crisis and identify next steps to protect homeowners and workers.

He cited a survey from a survey by the  AARP that noted that one in three workers has considered delaying retirement, and that said that one in five middle-aged workers “stopped contributing to their retirement plans in the last year because they had trouble making ends meet.”   Of course, 78% of respondents to that survey – reflecting the perspectives of 1,628 individuals who were at least 45 years old, interviewed between September 3 and September 2 – had not stopped saving, and 85% said they hadn’t prematurely withdrawn money from those retirement savings accounts.   A similar survey by AARP earlier this year also indicated that about a quarter of workers had cut back on retirement savings – while nearly as many increased contributions – a question that didn’t appear in the latest survey (see  IMHO: The Rest of the Story ).  

“Unlike Wall Street executives, American families don’t have a golden parachute to fall back on,” said Miller. “It’s clear that Americans’ retirement security may be one of the greatest casualties of this financial crisis.”

Miller concluded by predicting that “…I expect that we will be back here repeatedly until we can ensure greater security for the retirement of hard-working Americans.”

Congressman Howard P. “Buck” McKeon (R-California), the panel’s senior Republican, acknowledged that “Today’s hearing is an important first step in examining how the ups and downs of the financial markets impact workers’ retirement security.”   He went on to caution that “…while I commend Chairman Miller for holding today’s hearing, it is critical that Congressional oversight in this area not be limited to pre-election political theater.   Members on both sides of the aisle should be permitted to examine these issues when Congress is in session, and with a full opportunity to explore the causes of the current financial crisis, the impact on workers and families, and what can be done to prevent such a catastrophe in the future.”

The hearing included the perspectives of several experts:

Jerry Bramlett, President/CEO of BenefitStreet, Inc., acknowledged the size of the market's impact on retirement plan participants, but advocated caution in response.   "Given that most 401(k) participants are not investment experts, there is a danger that many of them will over react to this market downturn," he said.   "For participants with still many years to retirement, a drastic abandonment of equity positions in their retirement account will only serve to lock-in as of yet unrealized losses. Markets do go up and down and 401(k) participants must try to remember to think long-term."

However, Bramlett did not advocate doing nothing.   "Current participants should take the time to evaluate where their new contributions are being invested and perhaps consider less volatile investments that will allow them to better diversify their entire account," he advised the committee.   Bramlett said that he didn't believe the 401(k) system was doing an adequate job of educating participants on how to invest as they get closer to retirement - and recommended that Congress instruct the Labor Department to "develop educational materials specifically for 401(k) participants that have reached age 50 to assist them in better managing their account in preparation for retirement."

Speaking specifically to issues raised during the current financial crisis, Bramlett noted plan fiduciaries need to make sure that, when offering a stable value or fixed interest fund, "such funds are diversified across a large number of financial institutions."   He also noted that some real estate investment funds have frozen or restricted distributions, and the existence of situations where retirement investments in insurance contracts could be subject to back-end loads or contractual prohibitions on withdrawals.   He also cautioned about funds advertised as "low risk" (such as short-term bond funds) that contain high-risk assets - and threw his support behind Congressman Miller's 401(k) fee transparency bill (H.R. 3185 - see  Miller Fee Bill Cruises through House Committee ).

The committee also heard from Dr. Teresa Ghilarducci, Professor of Economic Policy Analysis at the New School for Social Research.   Ghilarducci offered up some short-term solutions - that Congress let workers trade their 401(k) and 401(k) - type plan assets (perhaps valued at mid-August prices) for a Guaranteed Retirement Account composed of government bonds (earning a 3% return, adjusted for inflation). 

She also outlined a long-term solution - that, going forward, Congress establish universal Guaranteed Retirement Accounts into which the federal government deposit $600 (inflation indexed) every year for every worker, and every worker (not in an equivalent defined benefit plan) would be required to have 5% of their pay deposited.  

"The 5% target comes from the basic math that an average earner saving 5% of pay over a life time with a guaranteed 3% rate of return plus inflation would supplement their Social Security benefits to achieve a 70% replacement rate at retirement," Ghilarducci explained.

The proposal is one she had made before, most recently in her book "When I'm 64." (see  IMHO: Conspiracy Theories ).  That proposal would also do away with the current deductions for 401(k)s, the accounts could not be tapped into prior to retirement, would pay out only on an annuity basis, and would not be available to heirs.   "The sooner we admit that our 30 year experiment with 401(k) accounts has failed the sooner we can use these precious government subsidies efficiently and equitably," she said.

Dr. Peter Orszag, Director of the Congressional Budget Office (CBO), cited data from the Federal Reserve that indicated that the decline in the value of financial assets cost pension funds (private-sector and public-sector combined) roughly $1 trillion from the second quarter of 2007 to the second quarter of 2008 - "…and there has been a significant further drop in asset prices since then," he noted.   Additionally, "by CBO's estimates, the value of the assets held by defined-benefit plans has declined by roughly 15% over the past year," Orszag noted.   "Overall, according to CBO's estimates, defined-benefit plans' assets net of liabilities may have decreased by 5% to 10% over the past year".

Moreover, he noted that since defined contribution plans tend to be more heavily weighted toward stocks than defined-benefit plans, "…the value of assets in defined-contribution plans may have declined by slightly more than that of assets in defined-benefit plans."   Furthermore, "to the extent households view balances in defined-contribution plans as part of their overall portfolio of wealth, a decline in those balances could lead people to reduce or delay purchases of goods and services" - and, he noted, "it could also lead some workers to delay their retirement."

Jack VanDerhei, research director of the Employee Benefit Research Institute, said that while the impact of the current financial crisis on defined benefit (pension) plans was "impossible to quantify", but he noted that "…it is obvious that a marked reduction in funding ratios and/or increase in volatility may make continued sponsorship of these plans less attractive under some forms of pension accounting modifications."   He also noted that the Pension Protection Act of 2006 (PPA) has established specific restrictions with respect to freezing of accruals, plan amendments and lump sum distributions as a function of funding ratios.

He also outlined the particular impact the market shifts stood to have on older wokers.   "While older employees have average equity allocations that are lower than their younger counterparts (and hence are thought by some to be less vulnerable to negative returns in the equity markets), their average account balances are significantly larger and therefore have more to lose in a significant downturn," he said in his testimony.

He cited a recent Hewitt Associates observation that participants "appear to be taking a long-term investment strategy for their 401(k) retirement assets by choosing an asset allocation and staying with it," and that net transfer activity was "consistently low."   Regarding those asset allocation choices - and their application to older savers - VanDerhei noted that based on unpublished EBRI research, the average equity allocation for target date funds designed for individuals in the 56-65 age range was 51.2% at year-end 2006.   "That would imply that approximately one-half of the consistent sample participants in the age 56-65 age category would have had at least a 20% reduction in equities at year-end 2006 if they were allocated 100% to target date funds," he said.  

He noted that EBRI is currently conducting an analysis of target-date funds for defined contribution plans, a project that he said will incorporate three distinct, but interrelated, phases.   The first phase would provide an empirical analysis of the use of target-date funds in 401(k) plans, the second would focus on a conceptual analysis of the optimal construction of target-date accumulation principles for defined contribution plan participants (including the extension of these principles into the decumulation phase), and a third phase that he said will include an empirical analysis of the choice of target-date funds by plan sponsors.   

"Hopefully, the additional insights generated by this research will assist in providing a more informed asset allocation for those nearing retirement age," VanDerhei noted.

Dr. Christian Weller, Associate Professor of Public Policy, University of Massachusetts-Boston, testified that "…public policy should strengthen the existing DB plans that already do a good job of offering retirement security to American families," specifically those for multiemployer and public-sector DB plans.   Additionally, he said that policymakers should consider added incentives for employers to offer access to qualified plans - specifically recommending an "automatic IRA" proposal that Weller said "…does this by requiring that employers above a certain size offer access to direct deposits into an IRA, or by changing public saving incentives."  

He said that "more could be and should be done to encourage employer contributions, either as match or as non-matching contributions," and he cited several proposals that have included mandatory employer contributions in an effort to increase DC plan coverage.   He also noted Ghilarducci's "Guaranteed Retirement Accounts," discussed above.

"We must instead improve retirement security by building a better DC plan and strengthening DB plans so that all Americans can look forward to a comfortable retirement and actually have the means to finance it.

Weller acknowledged that there was no single "silver bullet" policy response to the challenge, calling on policymakers to take a pragmatic approach.   "They should consider all efficient policy options to increase the number of workers with a retirement savings plan, to raise retirement saving—especially among lower-income workers, those who work for smaller employers, and minorities—and to reduce the risk exposure of retirement savings."

Opening statement

McKeon Statement on Retirement Security and the Financial Crisis

Archived webcast

Witness Testimony:

Jerry Bramlett
BenefitStreet, Inc.

Dr. Teresa Ghilarducci

Professor of Economic Policy Analysis
The New School for Social Research

Dr. Peter Orszag
Congressional Budget Office

Jack VanDerhei
Research Director
Employee Benefit Research Institute

Dr. Christian Weller
Associate Professor of Public Policy, University of Massachusetts-Boston
Senior Fellow, Center for American Progress