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Where Washington's Leaning on Retirement Issues

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar. I'm here at the Morningstar Ibbotson Conference. I'm here with Jamie Delaplane. Jamie is a partner at Davis & Harman, a law firm, and he is also a retirement policy specialist.

So Jamie, you gave an interesting presentation this morning in which you talked about some hot button issues in Washington that affect the retirement landscape. You noted that the target date area, which has grown by leaps and bounds over the past couple of years, is getting a lot of scrutiny in Washington following some terrible performance from some of these funds in 2008. Can you talk about what's going on there and what might be the implications for target fund investors?

Jamie Delaplane: Sure. I mean it's a natural implication of the growth I think that we have seen and the fact that we had the market downturn, people were asking tough questions and that's understandable. I think what we are going to see in the near term is more regulatory issuances from Washington about target date funds.

So at the individual level, we are about to get a checklist from the SEC and the Department of Labor of what as an individual investor should I be thinking about, what factors should I review, how do I understand the glidepath, so probably some helpful information for individual investors.

Likewise, the Department of Labor will give a checklist for planned fiduciaries, employers, that have these target date funds in their 401(k) lineup. What should they be thinking about and reviewing as they select a target date fund, as they oversee it and monitor it. So most of that I think will be constructive.

In the backdrop is, are there any threats to the position of target date funds in the marketplace? And the answer is really "no." Most policymakers believe these are very sound structures; they help participants and investors, they improve diversification, their glide path concept is the right concept.

So I think you will see some regulatory attention to sort of deal with the outliers at the margins who have been way out of the norm with asset allocation, or glide path strategies, and not through direct prohibition, but just nudging them towards the norm through these disclosure kinds of approaches.

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Benz: How about a look at whether these plans should be open architecture rather than sticking with a single firm's funds? Has there been any talk of looking at that issue?

Delaplane: That issue comes up in a variety of different contexts. I mean, it is relevant to the fee structure issue. It is relevant to investment choice. It is a pretty different conversation for the largest plans than it is for the very smallest plans because the economics are so different.

I'd say generally you have a preference from policymakers for open architecture, but there hasn't really been a desire to weigh in and say we are going to prohibit proprietary, we are going to prohibit funds of funds. There has been more skepticism, more tough questions asked, but I don't see any direct intervention by Washington to say it must be this way versus that way.

Benz: OK. One topic that has been abuzz here at the conference is the role of annuity products in defined contribution plans. What is your take on that issue? Should we expect to see more of a movement toward giving retirees a helping hand in income disbursement during retirement?

Delaplane: I think there is no way that this can't continue to be a really pressing part of the conversation in the defined contribution space. My own view is that I don't think the policy changes in the very near term are going to be that significant.

I just don't think we are at sort of a point of consensus and the policy proposals are robust enough to be enacted, but clearly there is a lot of interest, more ideas being put on the table. There will be some regulatory issuances to try to nudge this along.

My own gut tells me that in the near term it is going to be the marketplace that is going to sort of solve this puzzle, which we really haven't solved yet. And if there is a product solution, that's where planned sponsors will gravitate.

Longer term, three to five years, maybe more policy activity about nudging people in the direction of using annuities out of DC plans and maybe through a default distribution forum that's part lump sum, part annuity, but that's not going to happen in the very near term.

Benz: One other question you had indicated in your talk this morning that the administration and some policymakers seemed very interested in helping individuals who are trying to save but work for company that doesn't currently offer a plan. What do you think will happen there?

Delaplane: Yeah. There is a sort of signature initiative from the Obama team called Auto IRA which would require employers without qualified plans to offer their employees a payroll deduction IRA, automatically enroll people in a $5,000 annual IRA, no employer money, no fiduciary obligations, kind of a starter plan.

That is very likely to come to pass in the next several years. It has got bipartisan support, and meets a pretty pressing public policy challenge of how to help these folks without plans save, and interestingly this year the administration proposed treating the money as Roth IRA money rather than as pretax IRA money as the standard.

That brings the cost of the proposal way down because of these funny budget rules. So they have actually brought the price tag of enacting their proposal down from 30 billion to 10 billion. In this environment, 10 billion is not chump change but it is not that expensive. So I do expect this to become law in Obama's first term.

Benz: OK. And that actually would allow the participant contribution rates to be that much higher because they would be putting after-tax...?

Delaplane: Correct. Now, with this population a lot of low and middle income individuals will see how many stick with Roth or opt for pretax, but that is right, that in theory it let's you put more in the plan.

Benz: Right. OK, thanks Jamie. That's helpful, great insights. Thanks so much.

Delaplane: Thank you. My pleasure.