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SMay 29, 2009

How Can Government Help?

Scott Burns
How Can Government Help?

Can government do anything to solve the coming retirement income famine?

Yes, and it won’t cost a dime.  Simple steps could increase the retirement security of millions of workers.

These steps won’t be popular with the financial services industry because it will cut their income--- the billions of dollars every year that they take from our collective savings. In fact, the financial services industry has demonstrated that it is part of the problem as much as it is part of the solution.

As I have shown in earlier columns, the high cost of some 401(k) and 403(b) plans can cut a worker’s lifetime accumulation by one-third--- as much as a major market decline. Worse, when those high fees continue in retirement, the probability that workers will run out of money nearly doubles.

But that dismal reality has a big upside. If worker retirement incomes are reduced by as much as one-third by excessive fees, reducing those fees means retirement incomes could be increased by as much as 50 percent. Similarly, reducing fees could also mean that the risk of running out of money could be cut in half.

That makes investment fee reduction a high-stakes opportunity.

So how can government make it happen?

One notion is very simple: Open enrollment in the federal Thrift Savings Plan to all workers anywhere. This program has annual costs of only 0.03 percent. It provides workers with simple choices of ultra-low-cost index funds or portfolios of same. Workers could then choose between the plan, if any, offered by their employer and the low-cost plan offered by the federal government.

A 30-year-old worker could choose between accumulating as many as 11.5 years of final wages in the Thrift Savings Plan or as few as 7.7 years of final wages in his or her employer’s plan. I doubt that it would be a difficult choice.

Better still, employers could save money. Rather than wasting up to 3 percent of payroll to provide matching contributions that are consumed by fees, employers could create efficient plans. Or they could encourage workers to join the federal Thrift Savings Plan. Either way, employers could save up to 3 percent of payroll.

Think about this a bit and you see that workers and employers would both benefit. Only the financial services industry would be unhappy. But, as they say, “Two out of three ain’t bad.”

Could something this simple actually get done, since it would benefit millions of workers?

Get real. This is America, the land of the lobbyist and home of the vested interest. A proposal this simple would be attacked as anti-free enterprise by the Investment Company Institute, the entire insurance industry, the Employee Benefit Research Institute (EBRI), and benefit consultants of all shapes and sizes who make their livings off the complexity and expense of the current system. Some would say such a change would be ruinous to an already damaged financial services industry--- the same industry that workers are supporting with hundreds of billions of taxpayer dollars.

OK, so the easiest and most beneficial plan can’t happen. We’ll have to move on to another easy step.

I call it the Unified Savings Account (USA). It would not cost a dime of federal money. Congress would simply declare that all our retirement tools were created equal. Rather than have a $5,000 contribution limit for IRAs and a $16,500 contribution limit for 401(k) and 403(b) plans, the Unified Savings Account (USA) would allow any saver to put the same amount of money in an IRA as in a 401(k).

This simple step would allow teachers in expensive 403(b) plans and workers in expensive 401(k) plans to view all plans as equivalent. They could then find and use the low-cost alternatives that are readily available.

Today, for instance, you can contribute to a diversified mutual fund that costs only 0.08 percent and has a minimum initial IRA investment of $2,500. It is Fidelity Four-in-One Index fund (ticker: FFNOX). It could also be done with a more diversified fund such as one of the 237 life-cycle funds that have expense ratios between 0.18 percent and 0.75 percent. That last figure, 0.75 percent a year, has been identified as the maximum fair expense by an industry expert.

By providing a level playing field for contribution limits, this simple change would increase competition. It wouldn’t solve the expense problem overnight. Nor would it empty the fountains of disinformation that come from the financial services industry.

But it would open the door for better results through lower expenses. Money would move.

On the web:

Earlier columns in this series:

Part 1: They Don’t Call Them 201(k) s for Nothing

Part 2:: It’s Time for Plan B

Part 3: Building Inflation Tilt Into Your Retirement

Part 4: How to Build a Low Cost Inflation Hedged Retirement Portfolio

Part 5: The Payoff for Low-Cost Index Investing

Filed Under: Opportunity after Disappointment