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Encore
A blog about living in and planning for retirement

What’s Going On With IRAs?

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Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.”

Retirement needs are increasing as people live longer and face skyrocketing health care costs.  Meanwhile, retirement resources are declining as Social Security will replace less of pre-retirement earnings even under current law, employer-sponsored plans are increasingly 401(k) plans with modest balances, and people save little on their own.  As a result, retirees will have a hard time making ends meet once they stop working.

Appropriately, policymakers want to make the retirement system work better, and their focus is on 401(k) plans.  The Pension Protection Act eliminated barriers and introduced safe harbors to encourage automatic enrollment in 401(k)s.  The legislation also recognized that the inertia that makes automatic enrollment effective for participation can lock people into low levels of contributions.  To combat this problem, the legislation encouraged automatic increases in the default deferral percentage.

On the regulatory front, the Department of Labor has expressed concern about the cost to participants of 401(k) plans and has issued regulations requiring 401(k) sponsors to disclose fees and expenses.  These items are extremely important.  For example, an extra 100 basis points reduces a 401(k) participant’s real rate of return by about 25%.

In terms of ongoing debate, experts are concerned about how 401(k) participants will withdraw their funds once they stop working.  If they withdraw too much early, they risk exhausting their resources; if they withdraw too little, they may deprive themselves of necessities.  Annuities, which provide a guaranteed stream for life in exchange for a one-time premium, could solve this problem, but people tend to hate annuities.  So a debate has emerged about having a default provision whereby some portion of 401(k) balances would be automatically annuitized.

All the legislation, regulation, and debate is warranted.  401(k) plans need to work as well as possible.  But that is not the end of the story.  Contrary to public perception, most of people’s retirement assets are not in 401(k) plans.  They are in Individual Retirement Accounts (IRAs), which currently hold more assets than either defined benefit plans or 401(k)s (see figure below).  Most of the money in IRAs consists of rolled-over balances from 401(k) plans.

The bottom line is that everyone is focused on a component of the retirement system that holds a stagnant share of retirement assets.  The real money is increasingly in IRAs.  Yet virtually none of the legislation, regulation, or policy debate applies to these accounts.  And participants are more at risk with IRAs than with 401(k) plans.  IRA participants have no fiduciary to look after their best interest, they “pay retail” for their investments, and their spouses have little protection.

The challenge is that changes to 401(k)s do not automatically apply to IRAs.  IRAs and 401(k)s are covered by different parts of the Internal Revenue Code, and most ERISA provisions cover only plans provided by the employer.  But to keep focusing on 401(k) plans when the money increasingly migrates to IRAs just does not make sense.  We are fighting the last war.

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    • Alicia whack-a-mole. She pops up everywhere as the lib expert, writing article and research paper after another targeting 401k’s , now IRAs, any form of Defined Contribution plan…that isn’t…a GOVERNMENT RUN DB plan for all! Sound familiar? Good grief, just come out and say it. You want to boil the frog legislatively and confiscate everyone’s private assets and throw them in the proverbial Govt. DB plan pot. To industry observers, she has been promoting the same thing for 10+ years. Warning to all to read her writings and think clearly about what you know of the Liberal Democrat/Obama position. No, she isn’t promoting the Obama position, she is the original socialist plant from way back.

      On a different tack, “IRA participants have no fiduciary to look after their best interest, they “pay retail” for their investments, and their spouses have little protection.” One, who in their right mind would be a fiduciary for retail IRA assets knowing this lawsuit happy, if the value of my account goes down I’ll sue culture? You won’t get people to willingly do this. My favorite is number two. You pay retail. Well…your point is what? You pay retail for many things. Shouldn’t this line of reasoning (no retail) apply to products outside of the investment world? Say cars made by GM and Chrysler, or how about Macs and Ipods? Finally, number three (what she is looking for is QJSA/spousal consent on IRA’s amongst other things I assume). This begs the question of not only who’s money is it but also, do you trust your spouse? How about finding out these things pre-marriage rather than relying on IRA legislation. Reader, note the themes. No responsibility for one’s actions, hold my hand, if it goes up great, if it doesn’t I’ll sue. None of this should sound novel given the last 3 years of liberal “glory”.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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