When the stock market hit its all-time high in October 2007, few investors questioned the merits of their 401(k) plan. Two years later, their feelings are different.
As many investors continue to nurse the wounds of losing more than a third of their retirement savings, many question if there isn't a fundamental flaw in 401(k) plans. Should the system be scrapped and replaced with something without all the risk?
Though the volume of the calls for change have quieted a bit as the stock market soared about 60 percent since March, legions of investors remain anxious their 401(k) might weigh them down again.
There are several ideas floating around Congress that include increased disclosure of fees in mutual funds and new regulations about 401(k) investment advice.
Michael Townsend, as vice president of legislative and regulatory affairs for Charles Schwab & Co., analyzes government proposals to determine how they would affect individual investors. He offers insight into what's under consideration.
Q: Is the discussion of retirement savings a high priority in Washington?
A: There's no question that retirement savings issues are on the radar screen, but they definitely don't rise yet to the level of the big-ticket issues that we're watching — like health care reform and the overhaul of financial regulations. What might, or might not, happen with retirement savings is somewhat dictated by what happens to other big-ticket issues and whether there will be time to focus on retirement accounts.
There are a couple of proposals both at the legislative level in Congress and on the regulatory side. In the 401(k) space, fees and investment advice top the list.
Q: Let's take the fee disclosure issue first. This legislation forces companies operating mutual funds within a 401(k) plan to clearly disclose management and other fees. What's the status of this proposal?
A: There's a House bill that contains both fee disclosure language and investment advice provisions. It has moved through the Education and Labor Committee, chaired by Rep. George Miller of California (D).
Advocates of the changes are waiting to see what the Ways and Means Committee does with it. Some lawmakers believe action may be taken in December, but something's more likely to happen in the early part of 2010. There has not yet been a ton of momentum on this issue on the Senate side. While the House may move a bill it's not at all clear where this ranks on the priority list in the Senate.
Q: You mentioned investment advice is also a part of the bill, but isn't the Department of Labor also developing similar rules as part of its regulatory responsibilities?
A: Yes. At the same time the investment advice issue is working its way through Congress, it may ultimately be addressed more quickly through the regulatory process — which means it may be unnecessary to address investment advice in a new bill. The Department of Labor postponed implementation of some rules approved by the Bush administration in its final days. The Obama administration had some concerns about the possible conflicts of interest in the Bush rules, which would have allowed certain advisers who sell investment products to also give advice to consumers about which products they should buy. Critics said there was no certainty those advisers, who might have profit motives to push one product over another, could separate their interests from those of the consumer.
Q: When might the Labor Department rules take effect?
A: They are quite far along in the process of drafting new regulations and we'll likely see those late this year or early next year. Then there will be a short comment period, then they'll move forward to finalize them. It's quite possible the regulatory process may overtake the legislative process in this area.
Q: What's included in the regulations?
A: We'll see tightening of the language to be more restrictive to be sure participants can get conflict-free advice. How they're going to do that exactly, we're all waiting to see.
Q: There's been some discussion around a wholesale reform of the 401(k) system because of steep losses some investors suffered. Is there a possibility of a significant overhaul?
A: There's been a lot of talk about that, but it really peaked last fall. While there have been some proposals and there was a hearing in the House Education and Labor Committee as they looked at proposals. I haven't sensed a broad consensus on any approach. My sense is that it's more likely to be reform within the current systems rather than a wholesale move to some sort of alternative system.
Q: Has the stock market recovery since March helped blunt discussion of an overhaul?
A: The market recovery may have at least slowed some of the enthusiasm among the public and Capitol Hill for a wholesale solution. Retirement savings plans are on the presidential agenda. The president gave a Labor Day radio address focused on retirement savings ideas. From my perspective it's interesting that he talked about these issues at all, with everything that's going on in this administration. That's indicative of how 2010 will unfold. This will continue to be an issue that percolates along, not at the high profile level, but there's real genuine concern in the White House and on Capitol Hill to try to help people save more for retirement and that's going to be a continuing theme.