GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

December 2008
A 401(k) Bill of Rights
For the active retirement investor, having a 401(k) used to be like watching an adventure movie. The market throws in enough twists and turns to make it interesting, but you're always sure the hero will triumph in the last reel. These days it's more like an indie art film: unfamiliar, unsettling, and giving away no clues about how it might end.

For the passive saver, however, a retirement account was more like electricity or a dial tone. For years you might not even remember it's there. Then suddenly, something goes badly wrong.

The only thing both types of investor have in common is that they're hopping mad right now. And they're angry at practically anyone connected with the investment industry. Even, apparently, the people who are in charge of improving the situation.

The editors of the Wall Street Journal are certainly among the former type. A recent opinion piece expresses outrage and alarm about what House Democrats have in mind for 401(k)s. Will the promised "wholesale re- examination" of the pension system bring an Argentine-style nationalization? An end to tax- advantaged accounts in favor of some other scheme? Or a mandatory, state-run retirement account run by the Social Security Administration? The piece quotes some scary testimony to this effect, and staunchly defends the principles of ownership and choice that underlie DC retirement plans.

Within hours, the House leadership fired back with a press release. Noting that retirement investors have lost a staggering $4 trillion in paper assets in the last fifteen months, U.S. Representative George Miller (D-CA), the chair of the Education and Labor Committee, promised that the next Congress would work to "make sure the retirement system is as strong as possible for our nation's workers and retirees." In doing so, they would make no such radical changes, and stick to a set of generally accepted principles.

By defining the government's intentions in detail as "principles," Miller appears to have drafted a sort of bill of rights for 401(k) participants. Here's what it covers.

Reduce fees
Fee transparency, and fees in general, have long been major concerns for the authorities. Rightly, the release points out that 1% in fees can reduce the growth of an account balance by up to 20% over a lifetime. Wrongly, it slaps unspecified "Wall Street middlemen" with rhetoric more suited to a criminal indictment, and implies that virtually any fees may be unjustified.

Increase investment
Automatic enrollment is not a silver bullet, but does offer a huge improvement over purely voluntary participation -- an increase of as much as 35%. Without it, nearly 40% of those entering the workforce today may have no 401(k) savings at all when they retire. Once employees are in the system they need adequate, cost-efective options for diversification, as the piece also notes.

Provide advice
"All participants should have access to objective advice and investment information" is a motto that's refreshing to see in a legislative document. In our opinion, advice provides the essential bridge that can make 401(k) work to its full potential. It preserves the ideal of individual choice beloved of conservatives, while guarding against the reality of individual foolishness that keeps liberals up at night. Since it's a market solution to a social problem, enabled by progressive regulation, there's truly something for everyone.

Ensure portability
As the WSJ notes, much of the reason for the popularity of 401(k) is that accounts are individually owned and fully portable. But as Miller's release points out, many plans require a substantial vesting period for employer contributions. In addition, many accounts get stranded instead of rolling over when people change jobs. Therefore vesting and portability make up the final pillars of this little manifesto.

Before anyone gets too carried away with what these principles may mean for investors, for business, and for the economy, keep in mind that this is just a press release. It's not even an official proposal, much less a legislative agenda.

Talking points
It is, however, a sign of intent to make 401(k) a front-burner issue in the coming year. At a time when practically everything is falling apart before our eyes, it's laudable to take on an essentially a long-term issue like retirement savings. Of course those $4 trillion in losses are a powerful motivator. But the point is not to make up what's been lost, but rather to build a foundation for future gains that can deliver more coverage, better results, and ultimately more financial security for more people.

To get there, we'll need to transform the "pension system" into something a lot more systematic, effective, and universal than our current ad-hoc arrangements. If nothing else, these principles should help us start talking about what that may look like.

~~ Sherrie