U.S. lawmakers should reform retirement plans after 401(k) and Individual Retirement Accounts lost more than $2 trillion in value since October 2007, a group of consumer and labor groups said. 

The new consumer-labor group, “Retirement USA,” backed by the Pension Rights Center, the Service Employees International Union and the Economic Policy Institute, said the flagging economy has highlighted the inadequacies of 401(k) plans and increased the need for alternatives such as government-managed funds run with professional oversight. 

Retirement account balances plummeted over the past year, as the Standard & Poor’s 500 Index declined 38 percent. The average 401(k) balance fell to $50,200 in 2008 from $69,200 the previous year, according to a January study by Fidelity Investments. 

“We may not be able to help the people hurting right now, but we should set up something for the future that will make people more secure,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “It’s been shown clearly that individuals make a lot of mistakes.” 

“America’s promise of a secure retirement is central to our nation’s ideals,” Karen Ferguson, director of the Pension Rights Center, said in Washington March 10. “But for too many Americans, that promise is unfulfilled. We need a new system.” 

Lobbying groups representing mutual funds, banks and Wall Street say workers like employer-backed individual plans, especially being able to manage their own accounts. They continue to invest in them, said Investment Company Institute President Paul Schott Stevens. 

Workers Support 401(k)s 

“Working Americans strongly support 401(k)s,” Stevens said, saying only 3.7 percent of 401(k) account holders stopped contributing and fewer than one in 25 had taken any withdrawals in 2008. “People believe it’s theirs. They want it.” 

Stevens outlined industry-supported moves to “preserve and strengthen” 401(k)s at a Feb. 24 hearing of the House Education and Labor Committee, including more disclosure of plan fees, allowing workers to defer mandatory withdrawals and measures that would let employees diversify in plans based largely on one company’s stock. 

U.S. workers had $15.9 trillion in retirement assets at the end of the third quarter of 2008, down from $16.9 trillion on June 30, according to a February report published by ICI. That included $4.1 trillion in IRAs and $2.7 trillion in 401(k) plans. Mutual funds held $1.9 trillion in 401(k), 403(b) and other kinds of so-called defined-contribution plan assets, according to ICI. 

New Legislation 

Both sides say Congress may consider legislation this year. President Barack Obama’s budget includes some reforms, such as requiring small employers to offer a basic Individual Retirement Account. Other ideas range from changes to existing employer- based plans, such as automatically enrolling workers in so- called target-date funds, to a new system similar to plans in Australia and the Netherlands, where professional managers make investment decisions. 

Retirement issues “are moving up the radar screen in a significant way,” said Mark Iwry, a former Treasury Department official with the Retirement Security Project in Washington. 

The average U.S. worker “should have sufficient income, together with Social Security, to maintain a reasonable standard of living in retirement,” Retirement USA said in a statement. 

“Over the last year, we’ve seen the damage some of the financial wizardry has done,” said Steve Abrecht, director of benefits and capital stewardship at the Service Employees International Union. “Traditional 401(k)s don’t provide enough protection to investment risk.” 

‘Political Reality’ 

Edward Yingling, president and chief executive officer of the American Bankers Association, said at a March 5 gathering that included the ICI, the American Bankers Association, the Securities Industry Financial Markets Association and the American Council of Life Insurers that Congress will be responding to constituents’ sentiments about the economic crisis. 

“Everything has changed in terms of the political reality and the perceptions of financial companies,” Yingling said. “You may be underestimating how much the world has changed, how much anger there is. Some people may be staying the course, but they are angry. We’re going to spend a lot of time on defense.”
 
The ICI, the Washington-based trade group of the mutual- fund companies, says the system is working amid the calls for change. In an ICI survey of 3,000 households, taken in October and December, more than 80 percent opposed the government taking over investment decision-making and almost three-quarters said retirement plan tax incentives should be preserved, Stevens said. 

Other proposals for reform include a new automatic IRA option for employees of small companies and an expanded tax credit for saving. 

Automatic IRA 

The automatic IRA, as proposed by the Retirement Security Project, a nonpartisan policy research group, would apply to businesses with 10 or more employees that have been in business for at least two years that currently don’t offer a retirement plan. The employer would divert 3 percent of wages to an IRA. The employee could adjust the amount down or up to the current Internal Revenue Service limit of $5,000 per year. 

The savers’ tax credit would give lower- and middle-income taxpayers a credit of up to $1,000 in addition to the existing benefit of lowering taxable income through retirement accounts. 

These ideas “are ambitious but attainable, in the here and now,” said Iwry of the Retirement Security Project. “The specifics have been worked out to a considerable degree. Bills have been introduced. Hearings have been held.”