You’ve probably heard the rumors about big changes in the IRA and 401(k) industry and even the potential risk of automatic enrollment or confiscation of qualified retirement plans. Of course, QRPs were not initially designed to start a new piggy bank fund for the U.S. Treasury Department — at least that’s not what we signed up for. So I decided to look into these rumors and see for myself rather than relying on the word on the street.
I have to say, the writing is on the wall and the facts are pretty scary. Anyone who has a significant amount of their money tied up in an IRA or 401(k) should get educated today, because tomorrow could be too late.
I always advocate keeping our freedoms, but I must admit that there are some good arguments that not everyone benefits from freedom in the market. After all, we do have a failing social security system and the next generation will need a similar program to rely on; the U.S. government is more than 16 trillion dollars in debt and we can’t just keep printing money or borrowing from China; not to mention the millions of Americans who signed up for an IRA or 401(k) but aren’t making enough profits (if any at all) to truly retire.
But should we really consider changing the rules in the middle of the game?
Five years ago the idea that retirement plans as we know them would completely change and possibly be transferred/switched/confiscated (for your benefit of course) into a government managed plan would have been ludicrous. But today it seems that there is a popular movement in favor of the idea and new laws are actually getting passed. It is sold to the public as just another annuity product that will ensure you don’t outlive your retirement fund, but those who “benefit” from these new plans may realize five years from today that there is no turning back.
What’s really going on
Conversations on new IRA plans have actually been going on for the past decade but the ball really got rolling a few years ago, and with all the different opinions and proposals it’s unclear where it will end up.
Eric Schurenberg, a writer for CBS Moneywatch, seems to think it’s not a big deal that Uncle Sam is publicly pondering ideas on how 401(k) providers might be “encouraged” to offer annuities to 401(k) participants and how those participants might be “persuaded” to convert their 401(k) assets into a stream of lifetime income. In an article written in 2010 titled; “Obama wants to steal your 401(k), and why you should be glad”, Schurenberg justifies “stealing your 401(k)” by finding comfort in the fact that these annuities will be facilitated by insurance companies and relying on the (so called) experts (i.e. Hewitt Associates, TIAA-CREF, the Pension Research Council at The Wharton School and some named associates at CBS MoneyWatch) who take the position that “Annuities are the best way to insure that you don’t outlive your money in retirement”.
It’s a strong sales pitch and I’m sure it worked out fine for the citizens of Argentina, France, Hungary, Ireland, Poland etc… but I’m not buying it. In fact when I look at the face of a hard earned one-hundred dollar bill I remember the quote that Benjamin Franklin himself once said:
“Those who surrender freedom for security will not have, nor do they deserve, either one.”
Unfortunately Hewitt Associates, TIAA-CREF, the Pension Research Council at The Wharton School and CBS MoneyWatch are not the only “experts” who are weighing in on how to utilize your savings.
In mid-September 2010 the U.S. Departments of Labor and Treasury held joint hearings and took testimonies from various sources covering issues relating to “lifetime income options for retirement plans”. Sources included: VanguardCenter for Retirement Research, Allianz Insurance Company of North America, Lincoln Financial Group, TIAA-CREF, Prudential Retirement, Hewitt Associates, Putnam Investments, Principal Financial Group, MetLife, Fidelity Investments and others…
Did you get to put in your two cents? Perhaps your current IRA provider did it for you. You can find out by going to:
The hearing was to seek comments and opinions from the public (primarily lobbyists and large financial institutions) to “assist the agencies in determining what steps to take to enhance retirement security for retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring,”
National Seniors Council National Director Robert Crone says: “This hearing was set up to explore why Americans are not saving as much for their retirement as they could, however, it is clear that this is the first step towards a government takeover. It feels just like the beginning of the debate over health care and we all know how that ended up.”
Needless to say the two-day hearing stirred some controversy and outrage. After all, why would the U.S. Treasury Department be interested in a new plan for individuals to receive a lifetime income stream after retirement? Isn’t that what Social Security was supposed to do?
The DOL says the hearing was set up because “the departments were reviewing the rules under ERISA and the plan qualification rules under the Internal Revenue Code to determine whether, and, if so, how, the Departments could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in IRAs by facilitating access to, and use of, lifetime income products or other arrangements designed to provide a lifetime stream of income after retirement.” However, the real agenda becomes more apparent when you read some of the writings put out by the point man for the joint hearings, J. Mark Iwry.
Iwry is currently serving as the Treasury Department’s Senior Advisor to the Secretary and Deputy Assistant Secretary for Retirement and Health Policy, and co-authored President Obama’s legislative proposal for the automatic IRA. Iwry also co-authored several papers published by the Brookings Institute including a paper in July 2008 titled “increasing annuitization of 401(k) plans with automatic trial income”, in which he advocated the annuitization of 401(k) assets on a two year trial. The justification for this trial seems to be that individuals may run out of money if their retirement funds are self managed. Another article published by the Brookings Institute titled “Automatic Annuitization: New Behavioral Strategies for Expanding Lifetime Income” furthered Iwry’s proposal for automatic mandatory trial annuities and again in July 2009 Iwry co-authored a book titled “Automatic – Changing the way America Saves“. Automatic advocates for a “fresh approach to simplify retirement planning, and help manage the risks associated with today’s individual account environment.” What is this “fresh approach”? Basically, unless individuals take the initiative to make a different choice, they are automatically enrolled in a program where their “investments benefit from professional management and re-balancing, and their payouts include regular lifetime income”.
Fast forward to today and we can see that automatic IRAs are already being implemented in California as a state-run retirement plan for the private sector and will likely serve as a national model for other states that are trying to pass legislation as we speak. In fact, the Automatic IRA Act of 2013 is a federal bill proposed by congressman Richard E. Neal on 05/16/2013. If you’re following what’s leading up to this bill, it’s hard not to conclude that this will inevitably be passed into law.
It’s not very clear where exactly automatic IRAs would be invested but according to the proposed Automatic IRA Act section 408B(d)(3), investments would default into retirement bonds if there was not a specific alternative election made. So what exactly are retirement bonds? Let’s follow the code below to get a closer look:
408B(g) Retirement Bond-
(1) RETIREMENT BOND- The term ‘retirement bond’ means a bond issued under chapter 31 of title 31, which by its terms, or by regulations prescribed by the Secretary under such chapter–
You read that right, retirement bonds fall under:
USC Title 31 – Money and Finance
Chapter 31 – Public Debt
Subchapter I – Borrowing Authority
3106 – Retirement and Savings Bonds
(a) With the approval of the President, the Secretary of the Treasury may issue retirement and savings bonds…proceeds from the bonds shall be used for expenditures authorized by law…The maturity period of the bonds shall be at least 10 years…
Could it be possible that crazy man Robert Crone wasn’t so crazy after all? Maybe the term government takeover is a little harsh, but currently less than 10% of individuals choose to self-direct their IRAs, not to mention that most 401(k) or other company sponsored plans are not even given the option. So if new laws are being put into place that would by “default” go to a 10 year treasury bond, what would you call it?
To conclude, most people view their retirement plans as monopoly money anyway, so the effect of the changes may not be that drastic. But if you value the freedoms under current law, you may want to elect for a self-directed plan. Pretty soon, if you choose not to decide, you will still have made a choice.
Call us today to see how you can protect your right to choose.