Congress May Address 'Fundamental' Retirement Plan Reform

Written by Nick Curabba

For the second time in as many weeks, Rep. George Miller (D-CA) has hinted that broad and sweeping legislation addressing the U.S. retirement system may be in the offing when Congress convenes next year.  Miller, the chairman of the Education and Labor Committee in the House has suggested he may favor a complete overhaul of the tax code provisions regulating 401(k)-type retirement plans.  In addition, Rep. Miller continues to tout his legislation that would require additional types of service provider and fiduciary disclosures.

As has been widely reported, the recent turmoil in global financial markets, and related plunge in value in most major equity markets, has hit pension and retirement plans hard.  According to one estimate, (authored by the Congressional Budget Office), more than $2 trillion of retirement plan value has evaporated in the past 15 months. The CBO study, based on data from the Federal Reserve, suggests the declines have been felt in both public and private plans, and in both defined benefit and defined contribution plans.

Perhaps the most aggressive retirement plan-focused response to the current market crises is, simply, to do away with the current system.  More precisely, Professor Teresa Ghilarducci testified at the Education and Labor Committee’s October 7 hearing that the current system of providing tax incentives to employers and employees for retirement savings is not working.  Rather, she advocates doing away with the notion of pre-tax treatment of plan contributions in favor of a government-run add-on to social security in which: a) employees not otherwise covered by a defined benefit plan would be required to contribute 5% of pay per year, minus an annual, inflation-adjusted contribution from the federal government of $600.  In addition, the government would guarantee an annual, inflation-adjusted 3% rate of return. 

The basic 401(k) plan would no longer exist, as presently formulated, but would be converted into a plan that permitted post-tax contributions only.  It was not clear from her testimony how Professor Ghilarducci would propose to tax distributions. While this seems to us a sweeping – if not radical – response to the crises, it was received with some favor by Rep. Miller. 

Should this concept take hold, it gets put in the mix with other retirement security and pension plan reform proposals – including automatic IRAs, and additional fee disclosure – that we have already blogged about.  The 111^th Congress – following the quiet post-PPA 110^th – is shaping up to be red-hot with pension and retirement activity.