"401K Follies: A Proposal to Reinvigorate the United States Annuity Market" 

ABA Tax Section NewsQuarterly, Forthcoming

PAUL M. SECUNDA, Marquette University - Law School
Email: paul.secunda@marquette.edu

Even given potential issues with requiring an annuity option for 401K plans, the time has come to hedge as a society against the risk associated with the recent embrace of the 401K as the private retirement funding vehicle of choice in the United States. The proposal described herein seeks to diminish the retirement security deficit through three interlocking regulatory parts: (1) a requirement to offer an annuity as part of 401K distribution options; (2) mandatory education pre-distribution on annuities; and (3) mandatory fee disclosure by annuity providers. These steps will likely reinvigorate the annuities market in the United States and help to bring an end to the 401K Follies.

"DC Pension Fund Best-practice Design and Governance" 

GORDON L. CLARK, Oxford University Center for the Environment
Email: gordon.clark@ouce.ox.ac.uk
ROGER URWIN, Towers Watson
Email: roger.urwin@watsonwyatt.com

The design and governance of pension funds is an important topic of academic research and public policy and has significant implications for the welfare of participants. Here we focus upon the design and governance of defined contribution (DC) pension plans which have become the de facto model of occupational pensions in most countries. The study synthesises the findings of a year-long research project based upon in-depth interviews with the sponsors and managers of leading schemes from around the world. We begin with the dual nature of the governance problem characteristic of DC pension plans, emphasising aspects related to the self-governance of individuals in relation to their long-term interests as well as the ambivalence and conflicts of interest in plan sponsors. With those problems in mind, we focus on the design of DC pension plans and then their governance so as to challenge existing institutions in particular jurisdictions. Our findings have implications for employer-sponsored plans, multi-employer plans, and the public utilities that have been established or proposed that may transcend company-based and industry-based pension institutions. Whereas DC plans were once believed to be simple solutions to burdensome defined benefit liabilities, it is shown that there is nothing simple about a well-designed DC pension plan. In essence, the complexities associated with DB liabilities have been exchanged for complexities in the design and management of DC assets.

"The Origins of Savings Behavior" 

HENRIK CRONQVIST, Claremont McKenna College - Robert Day School of Economics and Finance
Email: henrik.cronqvist@claremontmckenna.edu
STEPHAN SIEGEL, University of Washington - Michael G. Foster School of Business
Email: ss1110@u.washington.edu

What are the origins of individual savings behavior? Using data on identical and fraternal twins matched with data on their savings behavior, we find that an individual's savings propensity is governed by both genetic predispositions, social transmission from parents to their children, and gene-environment interplay where certain environments moderate genetic influences. Genetic variation explains about 35 percent of the variation in savings rates across individuals, and this genetic effect is stronger in less constraining, high socioeconomic status environments. Parent-child transmission influences savings for young individuals and those who grew up in a family environment with less competition for parental resources. Individual-specific life experiences are a very important explanation for behavior in the savings domain, and strongest in urban communities. In a world progressing rapidly towards individual retirement savings autonomy, understanding the origins of individuals' savings behavior are of key importance to economists as well as policy makers.

"EBRI's Spring Policy Forum: Retirement Income Adequacy -- How Big is the Gap and How Might the Market Respond?" 

EBRI Notes, Vol. 31, No. 8, August 2010

JOHN A. MACDONALD, Employee Benefit Research Institute (EBRI)
Email: macdonald@ebri.org

The Employee Benefit Research Institute May 2010 policy forum addressed the topic “Retirement Income Adequacy: How Big Is the Gap and How Might the Market Respond?” This was EBRI’s 66th policy forum, which brought about 100 policy and professional experts to Washington, DC, in May 2010, to discuss new research on retirement income adequacy. This paper provides highlights of the new research and experts’ reactions to it. EBRI has been providing assessments of national retirement income adequacy using its proprietary Retirement Security Projection Model® (RSPM) since 2003. The 2010 EBRI Retirement Readiness Rating™ (RRR), based on the model, provides a benchmark for every American and their prospects for having sufficient resources to cover basic expenses and uninsured health expenses in retirement. This latest update includes consideration of the effects of automatic enrollment, auto escalation of contributions, and qualified default investments in terms of higher rates of participation, deferrals, and investment diversification. The 2010 EBRI RRR™ finds that almost two-thirds (64 percent) of Americans in the two lowest preretirement income levels will have insufficient resources to cover basic expenses and uninsured health costs after 10 years in retirement. Almost a third (29 percent) of those in the next-to-highest income level will run short of money to cover basic expenses and uninsured health costs after 20 years in retirement, as will more than 1 in 10 (13 percent) of those in the highest-income level. By age group, almost one-half of the Early Baby Boomer cohort (those now ages 56-62) are at risk of running short of money to cover basic expenditures in retirement.

The PDF for the above title, published in the August 2010 issue of EBRI Notes, also contains the fulltext of another August 2010 EBRI Notes article abstracted on SSRN: “Coverage of Dependent Children to Age 26 Under the Patient Protection and Affordable Care Act.”

"Paying the High Price of Active Management: A New Look at Mutual Fund Fees" 

World Economics, Vol. 11, No. 3, July-September 2010

ROSS M. MILLER, Miller Risk Advisors, SUNY at Albany - School of Business
Email: millerrm@alumni.caltech.edu

Financial economists have long known that actively managed mutual funds underperform comparable index funds and that investment management fees are a major contributor to this underperformance. This article shows that the impact of mutual fund fees is even greater when one examines what funds actually do with investors’ money. Many actively managed mutual funds have returns that are closely correlated with comparable index funds and yet have annual fees that can be 100 times higher. Because such “shadow” or “closet” index funds provide minimal active management of the assets they hold, the implied annual cost of the active management can dwarf the stated cost. This article provides a simple measure of what investors are actually paying fund managers for that active management that they can compute for themselves data available for free on the Internet. A sample of 731 actively managed large-cap U.S. mutual funds analyzed for the three years ending December 31, 2009 has a mean active expense ratio of 6.44%, more than 400% greater than their mean reported expense ratio of 1.20%. This article also finds that even large, seemingly low-cost, mutual funds common in retirement plans frequently have active expense ratios above 4% a year.

"Repeal Roth Retirement Plans to Increase National Savings" 

Tax Notes, Vol. 128, p. 773, August 16, 2010
U of Texas Law, Law and Econ Research Paper No. 189

CALVIN H. JOHNSON, University of Texas at Austin - School of Law
Email: cjohnson@law.utexas.edu

Roth IRA or 401(k) plans provide a tax exemption for profits generated under the plans. As much as $6,000 a year may be contributed to a Roth IRA, and as much as $22,000 a year may be contributed to a Roth 401(k). The author’s proposal would repeal the Roth plans to increase national savings. Roth plans have an ambiguous effect on private savings, because they can be funded with the addition or continuation of debt and because taxpayers reduce their savings in response to tax exemption for target savings, including savings for retirement. Roth plans also reduce federal revenue.

Congress allowed taxpayers to convert to Roth plans starting in 2010, and it scored the conversions as producing federal revenue. A conversion from a regular plan to Roth plan, however, is just a form of federal borrowing. Current cash to the government is offset by required revenue losses in the future. When taxpayers convert, they expect tax rates to go up or they have access to extraordinary returns, and the conversions are then an expensive and wasteful form of federal debt – unbudgeted and out of control.

The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop proposals to raise revenue. The Shelf Project is intended to raise revenue without a VAT or a rate hike in ways that will improve the fairness, efficiency, and rationality of the tax system. Now is the time for congressional staff work to be done to prevent the impending revenue crisis. An overview of the Shelf Project is found in ‘‘How to Raise $1 Trillion Without a VAT or a Rate Hike,’’ Tax Notes, July 5, 2010, p. 101, Doc 2010-13081, or 2010 TNT 129-4. Congress adopted its first Shelf Project in March 2010. New section 871(1), enacted in the Hiring Incentives to Restore Employment Act, is based on the Shelf Project proposal by Reuven Avi-Yonah, ‘‘Enforcing Dividend Withholding on Derivatives,’’ Tax Notes, Nov. 10, 2008, p. 747, Doc 2008-22806, or 2008 TNT 219-34.

"Retirement Savings of Private and Public Sector Employees: A Comparative Study" 

Journal of Applied Business Research, Vol. 26, No. 6, 2010

SWARN CHATTERJEE, University of Georgia
Email: swarn@uga.edu

This study examines the retirement plan participation and savings for United States government employees using the Panel Study of Income Dynamics data set. The findings of this study indicate that plan participation increases with age, income and educational attainment. Those government employees who participate in defined contribution plans make greater contributions into their retirement plans than the non government employees. Minorities and employees with lower income are less likely to participate in the Individual Retirement Accounts, while those with higher educational attainment are more likely to participate.