Senate Banking Subcommittee Discusses Retirement Security and Fee Disclosure
THE SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON ECONOMIC POLICY held a hearing yesterday to discuss the state of retirement security in the U.S. and how policies are affecting retirement preparedness.
In his opening statement, Chairman Jeff Merkley (D-Ore.) said that in the decades to come, Washington’s actions will have an impact on retirement security. He noted that the ways Americans save for retirement has changed over the past 30 years, including a shift from defined benefit plans to defined contribution plans.
Ranking Member Dean Heller (R-Nev.) said the retirement landscape is evolving and, despite the many options available to individuals to save, many Americans are struggling to prepare for retirement.
Testimony
In his testimony, Ted Wheeler, Treasurer for the State of Oregon, said more needs to be done to help Americans acquire a sufficient amount of retirement savings. He highlighted an AARP study recently conducted for the state of Oregon which found that one out of six employees has less than $5K in retirement savings. Wheeler noted that he believes it is important that states take on this issue in parallel with Congress.
Monique Morrissey, Economist at the Economic Policy Institute, said in her statement that 401(k) plans were not designed to be the primary retirement savings vehicle they have become. She advocated for expansion of Social Security to replace some of the cuts that were made in 1983 and said Congress should explore ways to make defined contribution plans more like defined benefit plans. Morrissey said Congress should “address some of the worst problems” with 401(k) plans and IRAs before encouraging further savings through those vehicles.
In his statement, Robert Hiltonsmith, Policy Analyst at Demos, advocated for significant reform or replacement of 401(k) plans, highlighting risks for the account holder including: market risk; longevity risk; volatility risk; and contribution risk.
Kristi Mitchem, Executive Vice President at State Street Global Advisors and Head of the Americas Institutional Client Group, argued in her testimony that employers play a “central role” in helping individuals save for retirement and said large plans in particular have been successful due in part to automating good behavior. She advocated for more plans to adopt auto features such as automatic enrollment and automatic escalation.
Mitchem also expressed support for the pooling of retirement assets through multiple employer plans (MEPs) to attract small employers to offer a retirement plan to employees. She suggested Congress enact a safe-harbor for MEPs that adopt auto features.
Question and Answer
Sen. Elizabeth Warren (D-Mass.) focused her questions on fees and their impact on retirement security. She noted the 2012 Department of Labor (DOL) regulations requiring the disclosure of 401(k) plan fees and asked what impact these have made. Mitchem said, in large plans at least, the disclosure rules have brought about a 20 to 25 percent decrease in fees.
Warren noted that IRAs hold about $5.3 trillion in assets compared to only about $3.5 trillion in 401(k) plans and asked if there was any reason not to require IRA fee disclosure. Hiltonsmith said there is no reason the same disclosures should not be required, but said there should be standards to simplify the disclosures and provide more meaningful information.
Merkley expressed concerns with excessive fees and asked if there was oversight of the fees charged in IRAs and disclosure of those fees. Hiltonsmith replied that he is unaware of any regulation in the IRA space. Morrissey remarked that it is the “wild west.”
Mitchem explained to the committee that IRAs are currently regulated by the Securities and Exchange Commission (SEC), invest predominately in mutual funds, and have clear requirements regarding fee disclosure. She noted that IRA fees are typically higher than 401(k) plan fees because the plans are individual, but added that Congress could provide incentives to encourage employers to keep employees in the 401(k) plan after leaving their jobs.
When asked by Merkley about the role of disclosure, Wheeler said disclosures are important as well as an explanation of what those fees mean. He added that fee disclosures should be consistent and simple.
Heller asked Mitchem about her statement that participants believe they need to save about 14 percent annually for retirement. Mitchem said auto features and a good default plan can help individuals save at those levels.
Heller asked Hiltonsmith if he has a 401(k) plan and if he wanted to reform it. Hiltonsmith replied that he does have a 401(k) plan and, through discussion with his employer, he was able to reform it. He added that there should be another option for saving that is simpler and has better annuity options, risk-pooling, portability, and lower fees.
Merkley asked how the average person should compare plans. Morrissey said employers and fiduciaries who understand the complexities should be the center of retirement security. She added that fee disclosure should be illustrative and simple, and alert people to the cumulative effect of fees. Morrissey also advocated for a move toward a Thrift Savings Plan (TSP) structure with limited investment options.
When asked about the MyRA proposal, Mitchem said it “gets to the heart of the problem” of how to expand access.
Merkley remarked that the tax deferral helps higher-income individuals who need it the least. Morrissey agreed, saying that two thirds of the tax expense goes to benefit only the top quintile of earners. Mitchem noted that auto features are a great equalizer in that regard.
Merkley asked if current Social Security benefits are enough to meet seniors’ needs and if benefits should be increased. Morrissey advocated for an expansion of Social Security benefits.
Heller asked Wheeler a series of questions relating to the health of the Public Employee Retirement System in Oregon and asked him to describe the recently created task force that will study the state of retirement in Oregon. Wheeler said the task force will meet for the first time in the next few weeks and its goals include: identifying potential savings tools; identifying the current baseline for savings in Oregon; evaluating current and potential tax incentives; and exploring the impact of pooled and professionally managed solutions. Depending on the findings of the task force, Wheeler said, there could be a number of solutions to help incentivize more employers to offer a plan.
More information and a webcast of the hearing can be found here.
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THE SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON ECONOMIC POLICY held a hearing yesterday to discuss the state of retirement security in the U.S. and how policies are affecting retirement preparedness.
In his opening statement, Chairman Jeff Merkley (D-Ore.) said that in the decades to come, Washington’s actions will have an impact on retirement security. He noted that the ways Americans save for retirement has changed over the past 30 years, including a shift from defined benefit plans to defined contribution plans.
Ranking Member Dean Heller (R-Nev.) said the retirement landscape is evolving and, despite the many options available to individuals to save, many Americans are struggling to prepare for retirement.
Testimony
In his testimony, Ted Wheeler, Treasurer for the State of Oregon, said more needs to be done to help Americans acquire a sufficient amount of retirement savings. He highlighted an AARP study recently conducted for the state of Oregon which found that one out of six employees has less than $5K in retirement savings. Wheeler noted that he believes it is important that states take on this issue in parallel with Congress.
Monique Morrissey, Economist at the Economic Policy Institute, said in her statement that 401(k) plans were not designed to be the primary retirement savings vehicle they have become. She advocated for expansion of Social Security to replace some of the cuts that were made in 1983 and said Congress should explore ways to make defined contribution plans more like defined benefit plans. Morrissey said Congress should “address some of the worst problems” with 401(k) plans and IRAs before encouraging further savings through those vehicles.
In his statement, Robert Hiltonsmith, Policy Analyst at Demos, advocated for significant reform or replacement of 401(k) plans, highlighting risks for the account holder including: market risk; longevity risk; volatility risk; and contribution risk.
Kristi Mitchem, Executive Vice President at State Street Global Advisors and Head of the Americas Institutional Client Group, argued in her testimony that employers play a “central role” in helping individuals save for retirement and said large plans in particular have been successful due in part to automating good behavior. She advocated for more plans to adopt auto features such as automatic enrollment and automatic escalation.
Mitchem also expressed support for the pooling of retirement assets through multiple employer plans (MEPs) to attract small employers to offer a retirement plan to employees. She suggested Congress enact a safe-harbor for MEPs that adopt auto features.
Question and Answer
Sen. Elizabeth Warren (D-Mass.) focused her questions on fees and their impact on retirement security. She noted the 2012 Department of Labor (DOL) regulations requiring the disclosure of 401(k) plan fees and asked what impact these have made. Mitchem said, in large plans at least, the disclosure rules have brought about a 20 to 25 percent decrease in fees.
Warren noted that IRAs hold about $5.3 trillion in assets compared to only about $3.5 trillion in 401(k) plans and asked if there was any reason not to require IRA fee disclosure. Hiltonsmith said there is no reason the same disclosures should not be required, but said there should be standards to simplify the disclosures and provide more meaningful information.
Merkley expressed concerns with excessive fees and asked if there was oversight of the fees charged in IRAs and disclosure of those fees. Hiltonsmith replied that he is unaware of any regulation in the IRA space. Morrissey remarked that it is the “wild west.”
Mitchem explained to the committee that IRAs are currently regulated by the Securities and Exchange Commission (SEC), invest predominately in mutual funds, and have clear requirements regarding fee disclosure. She noted that IRA fees are typically higher than 401(k) plan fees because the plans are individual, but added that Congress could provide incentives to encourage employers to keep employees in the 401(k) plan after leaving their jobs.
When asked by Merkley about the role of disclosure, Wheeler said disclosures are important as well as an explanation of what those fees mean. He added that fee disclosures should be consistent and simple.
Heller asked Mitchem about her statement that participants believe they need to save about 14 percent annually for retirement. Mitchem said auto features and a good default plan can help individuals save at those levels.
Heller asked Hiltonsmith if he has a 401(k) plan and if he wanted to reform it. Hiltonsmith replied that he does have a 401(k) plan and, through discussion with his employer, he was able to reform it. He added that there should be another option for saving that is simpler and has better annuity options, risk-pooling, portability, and lower fees.
Merkley asked how the average person should compare plans. Morrissey said employers and fiduciaries who understand the complexities should be the center of retirement security. She added that fee disclosure should be illustrative and simple, and alert people to the cumulative effect of fees. Morrissey also advocated for a move toward a Thrift Savings Plan (TSP) structure with limited investment options.
When asked about the MyRA proposal, Mitchem said it “gets to the heart of the problem” of how to expand access.
Merkley remarked that the tax deferral helps higher-income individuals who need it the least. Morrissey agreed, saying that two thirds of the tax expense goes to benefit only the top quintile of earners. Mitchem noted that auto features are a great equalizer in that regard.
Merkley asked if current Social Security benefits are enough to meet seniors’ needs and if benefits should be increased. Morrissey advocated for an expansion of Social Security benefits.
Heller asked Wheeler a series of questions relating to the health of the Public Employee Retirement System in Oregon and asked him to describe the recently created task force that will study the state of retirement in Oregon. Wheeler said the task force will meet for the first time in the next few weeks and its goals include: identifying potential savings tools; identifying the current baseline for savings in Oregon; evaluating current and potential tax incentives; and exploring the impact of pooled and professionally managed solutions. Depending on the findings of the task force, Wheeler said, there could be a number of solutions to help incentivize more employers to offer a plan.
More information and a webcast of the hearing can be found here.