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The Politics of Retirement: Legislative Proposals Hinge on Election

With Americans widely acknowledged to be saving too little for retirement, with employers continuing to back away from offering defined benefit plans, and with Social Security insolvency in less than 40 years, it is not surprising that legislators are looking for ways to make sure that a vast swath of the Baby Boomer generation isn't forced to live on government handouts and charity.

"With the aging of the Boomers, retirement issues have become first tier political issues," observes James Delaplane, a Partner in the law firm of Davis & Harman LLP.

Speaking at the SVIA Forum, Delaplane noted that the Republican and Democratic parties are sharply dividend in their approach to retirement security issues. Where the Republicans tend to favor defined contribution plans and individual responsibility, Democrats tout the value of corporate-sponsored defined benefit plans. In the tax arena, Republicans prefer to tax investment income lightly and generally support a flatter income tax, while Democrats seek to tax investment income more heavily and favor a more progressive income tax. As the New York Times put it on April 13, Delaplane observed, much of the war between the two parties in this area "boils down to a basic question: should Americans save for old age collectively as a nation, or as individuals through private savings and investments?"

President Bush has been pushing for the latter. Most prominently, he has called for the creation of self-directed individual accounts within the Social Security system. Elsewhere, he has proposed creating a variety of new tax-favored savings vehicles, including general-purpose Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), which would replace the various types of IRAs now available to investors, and Employer Retirement Savings Accounts (ERSAs), which would replace all types of employer-sponsored savings plans. All of these proposals would continue the trend of placing more responsibility for saving for retirement on individuals.

Delaplane said that of these measures, RSAs have the best chance of becoming a reality, whatever the political landscape after November 2. When President Bush defeated Democratic Senator John Kerry in the presidential election, other proposals dropped off Capitol Hill's radar screen.

In contrast to the more radical change that President Bush has been proposing, Delaplane noted that Democratic Representative Benjamin Cardin of Maryland has been working with Republican Representative Rob Portman of Ohio on legislation that would merely simplify and refine the existing retirement plan system. Among other things they are considering: expanding access to IRAs, promoting automatic enrollment and reducing vesting schedules in employer-sponsored retirement savings plans, renewing the federal income tax "saver's credit" now set to expire in 2006, and providing tax breaks on annuity distributions from retirement plans. Portman and Cardin have worked successfully together on retirement legislation in the past, Delaplane observed, suggesting that their legislation-first introduced in 2003-should get a fair hearing.

In the defined contribution plan arena, Delaplane said two issues that have generated much talk in recent years do not appear to have much chance of making it onto Congress' legislative agenda in 2005. One is the stalemate over whether offering investment advice to plan participants presents conflict-of-interest issues for plan sponsors, and the other is the use of employer stock in retirement savings plans and whether such use should be restricted. The latter was a hot topic in the wake of the Enron Corp. meltdown, which wiped out billions of dollars in employee retirement savings, much of which had been parked in Enron stock. Data compiled by Hewitt Associates indicate that company stock accounts for about 23 percent of the assets held in 401(k) plans right now.

Another popular 401(k) investment is mutual funds, which are capturing more of the government's attention. The Securities and Exchange Commission (SEC) has already introduced some reforms to the mutual fund industry in a bid to bolster fund governance and prevent future incidents of the late-trading and market-timing abuses that surfaced in 2003. Delaplane said it is probable that more reform is in the offing. One change that's been proposed by the SEC is a so-called "hard close" at 4 p.m. to prevent late trading. The proposal has been vigorously challenged by the retirement plan industry, however, because it would make it difficult for participants in employer-sponsored plans, especially those on the West Coast, to be assured of receiving same-day trading capabilities. Delaplane said the SEC is not likely to abandon the issue, but may well soften the "hard close" before implementing it. He said the SEC also is likely to push for greater transparency and disclosure of mutual fund fees.

In the defined benefit plan arena, Delaplane said, Congress can be expected to continue wrestling with a number of issues in 2005. High on their radar screens: the troubled financial status of the airline industry, which has left some airlines struggling to meet their pension obligations. Already this year, United Airlines, which is operating under bankruptcy protection laws, has said it "likely" will terminate its pension plan, and US Airways has sought bankruptcy court permission to suspend some contributions to its plan. If United wins bankruptcy court approval to dump its plan, its obligations would fall into the hands of the deficit-ridden Pension Benefit Guaranty Corporation, which itself could become insolvent under the strain of this new burden. Delaplane said Congress also may revisit next year the issue of what interest rate plan sponsors must use to calculate their pension liabilities and the degree to which employers should be allowed to convert traditional defined benefit plans to cash-balance plans.

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