Characterized as a “field hearing”, representatives of the committee heard testimony from several witnesses In San Francisco as the second the part of an investigation being conducted to examine how the financial crisis is affecting Americans’ retirement savings. Earlier this month, the Congressional Budget Office testified before the committee that American workers have lost at least $2 trillion in retirement savings over past 15 months ( Congress Considers Market Impact on Retirement Security ) .
However, the “news” emerging from the session was an announcement by Miller that, “according to documents obtained by the committee, the U.S. Pension Benefit Guaranty Corporation said they lost at least $3 billion in stock investments during the last fiscal year through August, and invested a significant portion of its funds in mortgage-backed securities.” In a statement, Miller noted that the head of the PBGC, Charles Millard, will testify before the committee on Friday in Washington regarding the agency’s financial problems.
Millard is a featured speaker at PLANSPONSOR’s Defined Benefit Investment Summit next week.
Much of the focus in today’s written testimony focused on the impact on retirees, including the impact of things like the minimum required distribution amount(s), and the need for a concentrated focus on retirement income solutions. The committee heard from two retirees; Roberta Quan, a retired school teacher from San Pablo, California, and Steve Carroll, a retired writer from Petaluma, California.
On October 10, Miller and Congressman Rob Andrews (D-NJ) called on U.S. Treasury Secretary Henry Paulson to suspend the tax penalty for retirees who are forced to make withdrawals but want to have additional time to rebuild their retirement savings (see Lawmakers Call for End of RMD Penalty ).
Also testifying were Mark Davis, a registered investment advisor (RIA) and Principal, Kravitz Davis Sansone, Inc. in Encino, California, Dr. Shlomo Benartzi, a frequently cited expert on 401(k) participant behavior and a professor at the Anderson School of Management at UCLA, and Dr. Jacob Hacker, the co-director of the Center for Health, Economic, and Family Security at the University of California at Berkeley.
Davis, a regular panelist on PLANSPONSOR's Plugged In webcasts, shared the experiences of his firm in helping participants and plan sponsors understand and respond to the recent volatility in the market. "For most working Americans, the closest they will ever get to professional investment advice are the encounters they have with investment educators, either independents, like us, or employees of their primary retirement services vendors," he said. Davis also cautioned that "investment sophistication has no correlation to the color of the collar. Many blue-collar Americans are no more at sea than many of their white-collar counterparts."
He also highlighted the value of investment education in the workplace - and the need to expand that education to individuals before they get to the workplace. "If Americans are to be given the responsibility to manage their own retirement investments as a means of lessening the liability of both employers and society, then students from Kindergarten through 12th grade should be taught basic financial principles as a means of getting ready," he cautioned. "We still teach Trigonometry, but most Americans graduate high school without knowing the importance of savings, or how credit cards, car loans, and mortgages work."
Davis also highlighted the frustrations of plan sponsors and participants constrained by the enforcement of short-term redemption fee policies, and the variances in the application of annuity products and terms, particularly in the smaller plan market.
However, he also noted "When the last bubble burst and the market fell from 2000 to 2002 we did not have as many tools to help as we do now. Very few plans had the chance to use diversified tools like target maturity funds. Automatic enrollment and Qualified Default Investment Alternative protocols were not yet prevalent. Advice and managed account tools had very little market penetration. During those years people in my profession did the hard work of comforting and educating employees, encouraging them to "stay the course" and keep contributing, assuring them that some day the market would actually go up again." He also noted that those participants saw "significant and real gains" during the bull market run from 2003 through 2007.
Davis' written testimony is online at http://edlabor.house.gov/testimony/2008-10-22-MarkDavis.pdf
Dr. Benartzi, who earlier this year was named one of PLANSPONSOR's Fifteen Legends (see Legends Awards: Dr. Shlomo Benartzi ), presented the committee with several recommendations. He suggested that:
- plans highlight long-term performance on the fist page of the statement, presenting the shorter-term results (such as the current quarter) on the second or last page to emphasize a longer-term focus
- plans provide retirement income projections on the statements
Benartzi also recommended that Congress provide the same help in defining "qualified retirement income solutions" that it had on "qualified default investment alternatives". While commending the Pension Protection Act's endorsement of automatic plan solutions, he said that the PPA "â€¦did not provide any guidance on what would constitute appropriate retirement income solutions for employees getting ready to retire." As a result, he said, "â€¦the vast majority of plan sponsors are totally confused about: (a) whether or not making retirement income solutions available to retiring employees is part of their duties and responsibilities, and (b) what type of retirement income solutions would be prudent to offer."
He also noted that the current financial crisis served to highlight the "need to rethink the type of retirement income solutions that would be prudent", and recommended that, since both defined benefit and defined contribution plans face longevity risk (the risk that people will live much longer than was anticipated), that the government could help facilitate the creation of a market for hedging systematic longevity risk by issuing longevity bonds. Benartzi explained that these are bonds that pay more if people live longer and vice versa, and are similar in concept to TIPS.
Dr. Benartzi's testimony is online at http://edlabor.house.gov/testimony/2008-10-22-ShlomoBenartzi.pdf
Dr. Hacker was critical of the ability of the 401(k)/defined contribution designs to effectively deliver adequate retirement benefits to most workers. "Too few workers are offered them, enroll in them, or put adequate sums in themÂ—a reflection of perverse incentives built into their very structure," he said. Instead, he recommended creating a "universal 401(k) that is available to all workers, whether or not their employer offers a traditional retirement plan."
He called for a default distribution option of an annuity at retirement, unless the worker specifically opted "out", and he recommended that 401(k) balances be reported to participants "not simply as a cash sum, but also a monthly benefit amount that workers would receive when they retired if they had average life expectancyÂ—just as Social Security benefits are reported."
Dr. Hacker's testimony is online at http://edlabor.house.gov/testimony/2008-10-22-JacobHacker.pdf