401(k)s to Stay, but Expect Changes

The issue of retirement security is now the third most important issue in Congress. However, said Graff, speaking at the ASPPA 401(k) SUMMIT last week, making the top three in Congress is not a good thing; “it means a lot more scrutiny.’

Congressman George Miller (D-California), despite being outspoken on many issues surrounding retirement programs, is committed to leaving the 401(k) plan intact, Graff said, saying that in February Miller was cited as saying “we must preserve and strengthen 401(k) plans.’

Graff said that he believes it is vital to keep the 401(k) plan in place, because the 401(k) is the only thing that has ever gotten working people to save for retirement; data from the Employee Benefit Research Institute show that when workers making $30,000 to $50,000 are covered by an employer plan, 75.3% of them save, but, when not covered, less than 5% of workers save. Further, the 401(k) primarily benefits the average worker, as the vast majority of participants make $150,000 or less.

“No one is getting rid of 401(k) plans, you can count on it,’ Graff said, “but that’s where the guarantees end.’ Graff said he expects that the 401(k) construct should remain the same; the exclusion from income is not really being challenged, but the rules governing 401(k)s will certainly be examined.

The buzz on Capitol Hill today is “401(k) reform,’ he said. So, advisers can expect that the discrimination rules and tax advantage status will remain intact but, “once the money is in the plan, all bets are off.’

Fee Disclosure

The new Department of Labor is taking a look at the 408(b)(2) regulations that were not finalized by the previous administration, Graff said. “If the only thing that happens to us is to show a little more fee disclosure…crack open the champagne,’ he noted, saying this is only one of many things he expects will be passed.

He noted that although he expects the rules to be finalized by the end of this year, the rules that were proposed under the Bush Administration will not be those that will be finalized by the Obama Administration. Graff said he anticipates that the new rules will require more transparency than the originally proposed rules, and may require some unbundling because Graff said he predicts fees will likely be divided into three buckets: investment fees, administrative fees, and transaction fees.

Target-Date Funds and QDIA Rules

The issue of appropriateness of investments in retirement plans is a large one in Washington, Graff said. One area where advisers can expect to see changes is surrounding target-date funds, Graff said. Those in Congress are scrutinizing 2010 target-date funds, specifically the equity exposure. This is “about the fact that [at an age] close to retirement, people lost money,’ he noted.

Along with the examination of target-date funds, Congress and the regulators will likely completely reexamine the qualified default investment alternative (QDIA) regulations and possibly reopen them (see “Target-Date Funds to Have Their Day in Congress“). That investigation is going to start at hearing in April about target-date funds. Graff said outcomes of the hearing may be that Congress will define what a target-date fund should look like or that a board of experts will define what allocation and investment methodology should look like for fund to be blessed as a QDIA. Further, Graff said he can almost guarantee that will be a stable value fund added to the QDIA rules.

Another investment area is that of index funds, and their use in retirement plans. Graff said he thinks there will be a push to make index funds required in retirement programs and there will also be a push to determine what you shouldn’t have in a plan.

There are a number of ideas in play to promote annuities, he said. There are currently three forms of proposals: a mandate that all defined contribution plans have an annuity as a distribution option; that the default distribution option for defined contribution plans be an annuity but participants have the right to opt out; or the most extreme proposal, mandating a distribution of an annuity at retirement that participants must invest in for 24 months, and then can choose to opt out.