By Pam Martens: May 13, 2013
Did you just find out your 401(k) is leaking 8 percent in a hodgepodge of Wall Street management fees, transactions costs, sales commissions, and marketing schemes. Maybe you did the math and realized your account value, without your new additions, is still where it was in 2007. Or did you just check BrightScope and find out that your 401(k) is so abysmal that you’ll need 18 additional years of work to make up for the $215,500 in lost retirement savings.
Or maybe you tuned in to the April 23 Frontline documentary on PBS to learn that it is quite possible for Wall Street to gobble up two-thirds of your retirement savings in your 401(k) while keeping you in the dark for the next 50 years.
If so, there’s no reason to seethe in silence. The U.S. Department of Labor wants to hear from you about a potential plan to move you from the clutches of Wall Street to the warm embrace of the insurance industry where companies like AIG – that needed a $182 billion bailout from the U.S. taxpayer to avoid defaulting on its annuity payouts to widows and orphans around the world – would be able to take over the slimmed down assets in your 401(k) in exchange for the promise of a fixed income stream in retirement.
The U.S. Department of Labor is nothing if not persistent. It rolled out this same idea back in 2010 and received a flood of hate mail for its effort. On February 2, 2010, the U.S. Department of Labor and the U.S. Treasury published a notice in the Federal Register asking for public comment on a multitude of issues pertaining to 401(k) plans. Three of the requests for comment were posed as follows:
“Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?
“Should an individual benefit statement present the participant’s accrued benefits as a lifetime income stream of payments in addition to presenting the benefits as an account balance?
“If the answer to question [above] is yes, how should a lifetime stream of income payments be expressed on the benefit statement? For example, should payments be expressed as if they are to begin immediately or at specified retirement ages? Should benefit amounts be projected to a future retirement age based on the assumption of continued contributions? Should lifetime income payments be expressed in the form of monthly or annual payments? Should lifetime income payments of a married participant be expressed as a single-life annuity payable to the participant or a joint and survivor-type annuity, or both?”
The government received 793, mostly vitriolic, responses with the common refrain that the government should keep its “grubby” hands off private savings. The government, however, was not suggesting that it would take over the accounts, it was asking if the insurance industry should issue an immediate annuity (fixed income stream) as the default option on a 401(k) when the retiree made no other election.
More reasoned responses went like this May 19, 2010 one from William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts:
“We note that, at this time, an annuity may not be an effective tool to create a stream of revenue to support retirees. The payouts from fixed annuities are substantially based on prevailing interest rates, and in the current low interest rate environment those payouts will tend to be low. Annuities can also be problematic because they are often complex, high commission, and high-fee products. The Securities Division has seen multiple instances where securities salespeople and advisers have sold older customers annuity products, particularly variable annuities, that were unsuitable for them. My office has taken enforcement action in several such cases. All too often, the high selling compensation payable for these annuities drove these inappropriate recommendations.”
An anonymous commenter from the state of Washington posted the following comment on February 21, 2010:
“I don’t believe requiring an annuity distribution option to 401k plans will result in consumer change. I have been managing benefits for large employers for more than 20 years. A lifetime annuity was an option in a number of the plans I managed; not once has an employee elected the annuity. Employees have two primary concerns that stand in the way of purchasing an annuity: (1) insurer insolvency (insurer may be stable now but what about 20 years from now?) (2) Desire to leave unused 401k balance to beneficiaries.”
Despite the overwhelming outpouring of responses against this idea, like the Dracula option that is never really dead, the Labor Department has tweaked and resurrected the proposal in a May 8, 2013 request for comment in the Federal Register. The tweak reads like this:
“…the Department is considering the following ideas: A participant or beneficiary’s pension benefit statement would contain that individual’s current account balance. In addition, the current account balance would be converted to an estimated lifetime income stream of payments. The conversion illustration would assume the participant or beneficiary had reached normal retirement age under the plan as of the date of the benefit statement, even if he or she is much younger.
“For participants who have not yet reached normal retirement age, the pension benefit statement would show the projected account balance, as well as the lifetime income stream generated by it.
“A participant or beneficiary’s current account balance would be projected to normal retirement age, based on assumed future contribution amounts and investment returns. The projected account balance would be converted to an estimated lifetime income stream of payments, assuming that the person retires at normal retirement age.
“Both lifetime income streams (i.e., the one based on the current account balance and the one based on the projected account balance) would be presented as estimated monthly payments based on the expected mortality of the participant or beneficiary. In addition, if the participant or beneficiary has a spouse, the lifetime income streams would be presented based on the joint lives of the participant or beneficiary and his or her spouse.”
The Labor Department admits in its background statement that the idea is to force workers to look at how inadequately prepared for retirement they are and save more. That benefits Wall Street now as it lives off the high fees embedded in darkness in the 401(k). (The expense ratios the Labor Department required to appear on statements beginning last Fall fail to capture all the hidden commissions, fees and transaction costs eating away at 401(k) balances like a swarm of locusts.) Down the road, the insurance industry will get the final bite of what’s left as uninformed retirees, mentally brainwashed for decades to expect that lifetime income stream option, take the road of least resistance.
None of this addresses the real issue: that the 401(k) has proven itself as a get rich scheme for Wall Street and a poverty driver for retirees. Even JPMorgan admitted in a comment letter that one of its own studies in 2009 found that “Two-thirds of 401(k) plan participants admitted they don’t read the plan information they receive from their employers or providers” and that “58% of participants indicated they did not have enough time to pay attention to their retirement investments on a regular basis.”
