By Cyril Tuohy
Two prominent retirement public policy experts delivered a blistering rebuke of the defined contribution retirement system, even taking financial advisors to task for charging high fees and in some cases dispensing bad advice.
In testimony before a Senate panel earlier this month, Robert Hiltonsmith, an analyst with the research and policy consulting firm Demos, said many individual retirement account (IRA) brokers and 401(k) financial advisors take advantage of a lack of knowledge among employers and employees.
Savers lose an average of nearly 1 percent in returns due to poor choices by plan fiduciaries, “in part likely due to poor or conflicting advice received from their plan financial advisors,” Hiltonsmith told the senators.
Hiltonsmith spoke March 12 before the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy.
The subject of Americans’ retirement preparedness has become a hot topic among lawmakers, as the financial crisis brought to light the precarious financial positions of tens of millions of Americans who saw their holdings vanish.
With the economy on the mend, lawmakers and the Obama administration have given serious thought to new ways to encourage millions of workers to secure a comfortable retirement for themselves, even as many workers have not saved enough.
Two bills, one sponsored by Democrats and another sponsored by Republicans, have been introduced in the Senate. Obama last month also launched the “myRA,” a simplified retirement account to get workers started on retirement saving.
Monique Morrissey, an economist with the Economic Policy Institute, said investment risks faced by individual investors are “often poorly understood even among supposed experts.”
She concurred with Hiltonsmith that the defined contribution system, originally sold to workers under the guise of “do-it-yourself” investing, has come up short – and that workers, not employers, have come out on the losing end.
Morrissey said the government should expand Social Security, preserve defined benefit pension plans, reform “upside-down tax subsidies” and adopt a model akin to the Thrift Savings Plan, the federal government’s equivalent to the 401(k) in the private sector, where options are limited and fees remain low.
A bill proposed by Sen. Tom Harkin, D-Iowa, and Rep. Linda Sanchez, D-Calif., would strengthen Social Security benefits by reforming the program’s benefit formulas and tweaking cost of living adjustments.
But is it really that clear cut? Has the defined contribution system short-changed employees as much as Hiltonsmith and Morrissey suggest?
Surveys find workers like many aspects of the defined contribution model, from its portability to the choices it offers to the unmatched convenience of the payroll deduction. Financial advisors are widely viewed as a net positive to investors.
Investors who go through life following a solid financial plan drawn up by advisors do better than investors that go without a plan.
Kristi Mitchem, executive vice president for State Street Global Advisors, which manages more than $305 billion in retirement plan assets, said that many employees working for large companies in particular, have done relatively well by their employer-sponsored retirement plans.
The real problem isn’t with the defined contribution system, she said. The challenge is with a “great divide” between employees at large employers who can set aside money for the future, and tens of millions of workers employed by small business, many of which don’t offer retirement plans to which workers can contribute in the first place.
“Large employers are much more likely to provide a retirement plan,” she said. “And when they do, the plan produces better results for those employees who participate in it.”