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Obama Middle Class Task Force Falls Short on 401(k)s

Pretty good, but not nearly good enough.

That's my takeaway after reading the Obama Administration's Middle Class Task Force agenda for propping up retirement security.

The Administration's main focus is to get more Americans to save for retirement. That's laudable and necessary. Estimates are that about 78 million Americans-half the workforce-currently do not have an employer-based retirement plan. Reintroducing two initiatives that were in last year's budget proposal, establishing an Automatic IRA and expanding/simplifying the Saver's Credit, are important steps to address this gaping hole.

What About the Half Already Covered by a Plan? The fact sheet released by the Middle Class Task Force also highlighted some 401(k) initiatives:

  • Improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price.
  • Encouraging plan sponsors to make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.
  • Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees' living standards will be eroded by investment losses or inflation.
  • Reviewing and requiring clear disclosure regarding target-date funds, which automatically shift assets among a mix of stocks, bonds, and other investments over the course of an individual's lifetime.
What's Missing The first bullet point, about 401(k) fee disclosure, echoes the 401(k) Fair Disclosure and Pension Security Act of 2009 that stalled out after being passed by the House Education and Labor Committee. But there was one stipulation not mentioned in the Task Force's 401(k) agenda that was in the House legislation: mandating that every plan offer an index fund.

Score one for the financial services industry. As I mentioned in an earlier post, low-cost index funds are kryptonite to the fund industry (where the majority of 401(k) assets are invested.)

I want to be clear: I don't think index funds are perfect, nor am I advocating that all Americans should adopt a 100% passive investment strategy. The idea here isn't to mandate plans only offer an index fund, or that participants must invest in an index fund. But if you are serious about helping improve retirement security within the construct of the 401(k) that relies on the participant decision making, then adding an index fund to the investment choices is a no-brainer.

Simply informing Americans of what they are paying doesn't seem like much help to me. You're captive to what is offered in the plan; all disclosure would do for participants in high-cost plans is show them that they are stuck in a lousy plan. That's help? Sure, maybe a plan's administrator, or god forbid the board of director's, would be motivated to bring down a plan's costs, especially the administrative fees that are the least transparent right now. But that's not guaranteed, and change on the corporate level tends to be pretty slow.

If you believe in effective nudges-and make no mistake, Cass Sunstein, co-author of Nudge: Improving Decisions About Health, Wealth, and Happiness is the Adminstration's chief of the Office of Information and Regulatory Affairs-adding an index fund strikes me as a more direct and immediate nudge that could improve retirement security. If you mandate fee disclosure, and you also make sure there's one low-cost fund that pops up in that disclosure that is 3x to 4x less costly than another option, I think that just might nudge some participants to focus on fees.

The task force asserts that "We need to do more to give families better choices to reach a secure retirement." Amen. Seems to me a low-cost fund should be one of the choices.

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