'Very Dangerous' Time For US Retirement System, ICI Head Says

NEW YORK --Some "alarmists" are seeking to exploit the current financial crisis to scrap 401(k) plans as they are known today, Paul Schott Stevens, president and chief executive of the Investment Company Institute, said Friday.

"And an agenda like that makes this a very dangerous moment for the future of America's retirement system," Stevens, who heads the mutual-fund industry trade group, told the National Press Club in Washington.

Recent research, he said, shows that isn't what Americans, who held about $2.7 trillion in 401(k) plans at year-end 2007, want.

Stevens also had some advice for retirement investors: "Stick with it. History tells us that markets will recover - and your accounts will rebound along with them."

While Stevens didn't name the "alarmists" to which he referred and the Investment Company Institute didn't want to elaborate, he did appear to make reference to a plan that has been put forward by Teresa Ghilarducci at New York's New School for Social Research. That plan would end the tax breaks for 401(k)s and instead give all workers an annual $600 inflation-adjusted tax credit for retirement and have them invest 5% of their pay into a government-run retirement account managed by the Social Security Administration.

"One notion is to replace your 401(k) with a promise that the Treasury would put $600 a year into an account for you," Stevens said. "Instead of choosing among assets from the full range of America's and the world's financial markets, workers would get yet another government promise - sign over your savings to Uncle Sam, and get a return of 3% over inflation. Gone will be today's tax incentives, and with them your control over your retirement savings."

Similar ideas are also gaining currency, Stevens said.

The retirement system must be improved and the ICI is open to reform and innovations, Stevens said, but the system must be looked at as a whole, including Social Security, retirement plans at work and personal thrift.

The first step to reforming the retirement system is to put Social Security "on a sound financial footing," he said. For the lowest-paid workers, Social Security benefits are projected to replace up to two-thirds of their working income, but, in fact, the system faces a huge funding shortfall, he said.

While Stevens offered no specific plan for addressing that problem, he said the mutual-fund industry doesn't advocate privatizing or personal accounts for the Social Security system. President-elect Barack Obama must renew Franklin Roosevelt's commitment that Social Security provide a secure and stable base for older Americans, he said.

Employer-sponsored retirement plans - defined-contribution and defined-benefit, or pension, plans - come on top of that stable base, Stevens said. However, pensions are far from universal, some have had to ease funding requirements due to the market's decline and they face serious challenges, such as underfunding, he said.

But 401(k) and other defined-contribution plans offer flexibility, control and portability - desirable characteristics for a mobile workforce, he said.

Still, these plans can be improved, Stevens said. The ICI endorses proposals enacted by Congress last week to allow retirees to postpone required minimum distributions from 401(k)s and individual retirement accounts, he said. Congress should also give workers, particularly older workers, the opportunity to contribute more to help them make up for ground lost in the last year, he said.

In addition, to encourage workers to save more, the tax-exempt contribution limits for the plans should be protected and their administration should be streamlined, Stevens said. In addition, automatic enrollment and sensible default investments should be encouraged, he said.

Workers who sign up for a plan must also have sound advice and information on key topics, such as investment risks, returns and fees, something mutual funds already provide, he said. All other investment options in the plans should offer such information, he said.

   Workers Not Raiding 401(k)s, Stevens Says 

The last year has been a "rough ride" for the 56 million Americans saving for their retirement through 401(k) plans and other private-sector defined-contribution plans, he said. Companies in the Standard & Poor's 500 Index have lost almost $6 trillion in market value in the current bear market, Stevens noted.

He noted, too, that half of the assets in 401(k) plans are invested in mutual funds, and said, "Our members are hearing from investors every day about the keen anxiety that they are feeling."

He warned investors, however, against bailing out of the market.

The Standard & Poor's 500 Index fell by 37% between 1999 and 2002, but for workers who had 401(k) accounts with the same employer throughout that period, the average account balance declined by only 8%, Stevens told his audience. By 2006, the S&P hadn't reached its 1999 level, yet for those consistent 401(k) plans, their average account balance was 79% higher, he said. If investors cash out of stocks now, it will be impossible to time their return so that they can participate fully in the rally, he said.

A survey conducted in the past few months of ICI members and other large firms that administer defined-contribution plans found that workers aren't abandoning or raiding their retirement plans, Stevens said.

The survey provided data on more than 22.5 million employer-based retirement plan participant accounts and the firms provided information on defined-contribution plan participant withdrawals, loans, contributions and changes in account balances through October 2008, the ICI said.

Only 3% of participants have stopped contributing to their defined contribution plans in 2008, the survey found. In addition, only 3.7% of defined-contribution plan participants took withdrawals in 2008, with only 1.2% taking hardship withdrawals, it found. While 15% of participants have loans outstanding from their accounts this year, that's in line with what the ICI has seen for many years in its studies with the Employee Benefit Research Institute, Stevens said.

Other recent research indicates that Americans don't want the government directing retirement investments, don't want to see the tax advantages of their 401(k)s and similar plans reduced, and believe that 401(k)s help them save and invest, Stevens said.

In a series of national telephone surveys of 3,000 households across the country, slightly more than four in 10 defined-contribution-owning households indicated that they probably wouldn't be saving for retirement if it weren't for the their defined-contribution plans, he said. The survey was fielded by GfK Customer Research North America in October, November and December, the ICI said.

Almost 87% of the households surveyed rejected the idea that the government, and not the individual, should make investment decisions for retirement accounts.

By Daisy Maxey; Dow Jones Newswires; 201 938 4048; daisy.maxey@dowjones.com