Social Security's not working. Pensions are practically extinct. Now 401(k)s are in jeopardy -- and it's up to us to save our retirement. Our special report shows you how.
Congressman George Miller has represented California's 7th Congressional District since 1975 and is currently chairman of the Committee on Education and Labor, which oversees retirement and pension issues. Rep. Miller aims to preserve and strengthen 401(k)s and other retirement plans by, among other things, achieving better transparency, automatic enrollment, and sources of independent financial advice. In October, he oversaw a hearing on "The Impact of the Financial Crisis on Workers' Retirement Security," which questioned the benefits (and tax breaks) of 401(k) plans. What follows is an edited transcript of his Nov. 21 conversation with Motley Fool Rule Your Retirement advisor Robert Brokamp.
Robert Brokamp: What is the status of H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act?
Congressman Miller: We passed legislation through the committee earlier this year, knowing that it wasn't going to be taken up in the Senate because of all the problems they have there. We are continuing to work with various actors in the financial community about improvements that can be made, and will continue to have hearings. I think that the meltdown in the financial markets has shocked many people about the vulnerability of their wealth to big market moves.
We have been pushing very hard for transparency in fees and costs because we see that, in many instances, the most expensive fund -- with maybe the worst performance -- is marketed the most aggressively. I think people need to know more about these funds, and what their real rates of return are.
I think now, as we start to see the more creative aspects of the market being used, that maybe people's funds are exposed to more risk than they were aware of, and there may need to be more transparency with the actual risk that in some cases had been imposed on funds as people have figured out ways to create margin accounts within people's 401(k)s. Those kinds of instruments raise some concerns. I don't know how widespread it is, but it raises some concerns of transparency and risk.
Then finally, transparency and what happens to you at the time that you roll over. You are 65, you are retiring, and you now have to do something with your funds. If you look in the financial publications and in the newspapers, you see very bold ads about guaranteed annuities. Well, we now find out that in many instances, those annuities were reinvested in the very same insurance companies that then took on a great deal of leverage, and they may or may not be able to continue to honor the annuity contract. Annuities have always been marketed as a safe, certain way to get a monthly payout or an annual payout.
That is an awful lot for the consumer to absorb, and not every consumer is a very sophisticated investor.
Robert Brokamp: Which has led to some of your other recent work in terms of having hearings on the adequacy of retirement savings and questioning 401(k)s in terms of whether they will really help people retire. That is certainly a valid question. We have all seen our 401(k)s drop in value. The alternatives also have their funding problems. Defined-benefit plans have also seen their assets drop, and Social Security has its challenges. As a policymaker, how do you weigh the pros and cons -- the potential risks and returns -- of all these different ways of saving for retirement?
Congressman Miller: It is hard. We have created an array of instruments. We have all different kinds of IRAs, we have [plans] for every conceivable purpose of saving -- saving for a home, saving for college, saving for retirement, saving for health care. You have all of them backed up by some tax incentive one way or another. Yet the conclusion of most of the people who study these issues is that Americans aren't saving enough. Too many Americans can't afford to save, and they are not saving early enough in their working career for an adequate retirement.
So it calls into question: Are we using the tax code to the best benefit of the savers? Are we getting the results that we want? Do we have too many saving instruments that confuse the investors? I don't know the answer to any of those questions yet, but I think they are all legitimate. People bristle sometimes when you put these questions on the table, but the fact is I think they are very legitimate questions that need to be asked.
First of all, if you look at all of the fees and the commissions that are associated with an IRA or 401(k), the only source of those revenues is the investor's hard-earned savings. So it is other people's money that these [financial services] people are making decisions about -- to dip into or justify the costs. The contest here is best phrased by Jack Bogle of Vanguard, when he said it is a race between the miracle of compounded interest and the tyranny of compounded costs. Now, you have to throw in "And unacceptable risk." Because too often, funds aren't exactly as they are represented to the lay investor.
Robert Brokamp: When it comes to costs, one of the lowest-cost and perhaps one of the best employer-sponsored retirement accounts is the Federal Thrift Savings Plan. Is there any talk about opening that up to non-governmental employees?
Congressman Miller: I don't want to overstate the talk, but yes. That has been raised. You have the same discussion going on [with health care]. If you can't get an adequate plan, President-elect Obama has talked about federal employees' health-care plan being the default plan. I think when you look at the thrift savings plan, it meets a lot of criteria about a low-cost, limited-choice approach for people.
In America, we can create so many choices, [which can] create uncertainty and confusion. Whether it is in the supermarket -- you don't know which of the 27 different kinds of bread to buy -- or you have thousands of investment opportunities, it creates confusion and uncertainty and it may even be an impediment to a person stating to save. I like the automatic enrollment idea to get a person on the road to savings, but then there has to be a low-cost default option that is conservative and safe. Then the person can start to see the miracle of compounded interest -- hopefully, and in a decent market. Then you may have created a saver for life. But if you just create chaos with all the choices, then I am not sure you have served the saver or the economy the best.
Robert Brokamp: I had read that you had brought up the possibility of doing away with required minimum distributions from tax-deferred accounts. Is that true?
Congressman Miller: We are looking at it. When people see a serious deterioration of their assets, requiring them to take a distribution in a situation as we are currently in, if they don't need to, you are requiring them to act contrary to what people are telling them, which is "Don't sell at the low point, stay for the long term, markets have cycles." Some people need that distribution, and they take it because they need it to live on. Other people are taking it because the law will penalize them if they don't, and I think that when you get into a serious economic downturn like this, it is contrary to the best interest of the saver, and maybe even to the markets.
I think we have pretty close to agreement of doing that. Hopefully we might pass the bill when we come back in the first part of December.
Robert Brokamp: What is your take on the solvency of the Pension Benefit Guaranty Corporation [the quasi-governmental corporation that insures private pension plans]?
Congressman Miller: It depends who comes through the front door in the next few weeks. I think they are in reasonably good shape, but obviously when you look at the ongoing discussions around the automobile industry, something of that magnitude, that is cause for concern. At the moment, it is a question of who shows up. There are other significant hits that could happen to them, but nothing of the magnitude of the automobile industry. But I don't think that is going to happen. I think that is going to resolve itself.
Robert Brokamp: What is your advice for the individual saver -- the person who looks at his or her 401(k), looks at the expenses, and sees a mediocre, at best, plan. What do you think the individual person should be doing to change the way things are?
Congressman Miller: Make arrangements to sit down with your plan advisor and have him walk you through your options and the cost. Employees are busy people, but if it is possible to arrange a time to meet with that plan advisor, I think that is probably the most fruitful thing employees can do. That can also then lead to their taking some interest in reading The Motley Fool.
Robert Brokamp: That is excellent advice. I like that last bit in particular.
Congressman Miller: I do.
Robert Brokamp: Well, good. Thank you, Congressman Miller.
Congressman Miller: Thank you so much.
Everything you ever wanted to know about 401(k)s, but were afraid to ask, is available in our special report.