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Retirement Self-Starters: Extending Automatic IRAs to America's Unprepared


WASHINGTON -- The Retirement Savings Project, a leading policy research group backed by The Brookings Institution, The Heritage Foundation and Georgetown University, and affiliated with FINRA and the AARP, is advocating new approaches for defined contribution plans, Social Security and tax policies to insure Americans' retirement future.

David C. John, deputy director of The Retirement Security Project and a frequent Congressional witness, sat down with Money Management Executive Editor Lee Barney to discuss new laws and regulations that will reshape 401(k) plans and offer new challenges and opportunities for the mutual fund industry-most notably reaching the 78 million Americans who have no workplace retirement savings at all.

MME: Before the 2008 financial crisis, fund companies were adept at offering products that met the hottest investment trends of the moment. Are the absolute-return, guaranteed and alternative strategies being offered now the right solutions?

David C. John: The trend I am seeing among asset management firms is an increasing interest in their consumer base for some sort of risk management. Of course, this is the flavor of the month, so we will have to see if this continues.

But right now, people are very much aware of the downside, and those who hold funds for retirement savings are now aware that they could reach the age of 60, and another market crash could put them 10 years out from their retirement savings goals. We are seeing an increasing number of ways to integrate safety, whether it's an annuitization or a limitation on losses, so yes, I think that's what is really needed.

We are also seeing a refocusing by the Department of Labor, Securities and Exchange Commission and Treasury on what is the best retirement solution for a 401(k), 403(b), 457 or other type of defined contribution plan, and the fact that the industry is already moving in this direction makes it much easier to reduce the impact of potential legislative or regulatory changes.

MME: How is the Retirement Security Project working with the powers that be in effecting some of these changes?

John: The Retirement Security Project is a curious organization, and loads of fun to be part of, actually. You are meeting me here today at Heritage, which is a small, conservative think-tank. RSP is a joint venture of Georgetown and Brookings, which is a centrist/liberal think-tank.

The principals of these groups started working together about five years ago on a couple of retirement savings ideas with the goal of trying to lift this issue out of the partisan, ideological mire that so much of Washington politics is trapped in. I was formally asked to join the project in January 2007.

Again, what we are trying to do is not, for instance, focus solely on Social Security, which often is a very partisan issue, but to actually improve retirement savings in the U.S.

We look at a variety of issues. One big issue one is coverage. As you are aware, only about half the workforce has access to a 401(k) plan, regardless of whether they take it up or not.

Mark Iwry, deputy director of the Treasury, and myself have devoted our efforts to promoting the Automatic IRA, which is a retirement savings vehicle for small businesses. The Automatic IRA has gained bipartisan support, having been endorsed by both presidential candidates John McCain and Barack Obama in 2008, and it's part of the Obama budget.

We go beyond that to the original purpose of the RSP to address automatic enrollment. We work on automatic enrollment within 401(k)s plans, and we are trying to use the same vehicle as Automatic 401(k)s to finance techniques in other aspects of retirement savings, such as state pension plans.

The Retirement Security Project, in turn, is part of the group called Retirement Made Simpler, which is a coalition of RSP, the AARP and FINRA, both of which are respected advocacy, regulatory, and policy organizations. The campaign was created specifically to provide companies with the tools and information they need to automate their 401(k) plans, including real-world experience from other companies that already have made the switch.

MME: The fund industry has successfully penetrated the large 401(k) market. Still, why is half the American population without a workplace retirement savings plan?

John: What we are going to see among the large fund companies that manage the nation's biggest large 401(k) plans is a continuing fight for market share as sponsors and investors seek a better deal, with the focus on cost. The variety of investments and the new type of investments that workers are interested in, will change.

And to a large extent, we will certainly see one fund administration company going after the business of another, as well as increasing pressure on the funds offered on the platform.