Retirees Facing a 401(k) Savings Crisis, Witnesses Tell House Panel in San Francisco
U.S. pension agency lost 3 billion in assets, Chairman Miller announces

Wednesday, October 22, 2008

SAN FRANCISCO, CA -- After a lifetime of planning and saving, a growing number of retirees are facing shrinking 401(k)s and increasing insecurity as a result of the ongoing financial crisis, witnesses told the U.S. House Education and Labor Committee today at a field hearing in San Francisco.

According to documents obtained by the committee, the U.S. Pension Benefit Guaranty Corporation said they lost at least $3 billion in stock investments during the last fiscal year through August, and invested a significant portion of its funds in mortgage-backed securities. The head of the PBGC, Charles Millard, will testify before the committee on Friday in Washington regarding the agency's financial problems.

"While this crisis may have started on Wall Street, it's Main Street that stands to suffer the most," said U.S. Rep. George Miller (D-CA), chairman of the committee. "More than ever before, there is an urgent need to help Americans strengthen their retirement savings."

Today's hearing is the second the part of an investigation the committee is conducting to examine how the financial crisis is affecting Americans' retirement savings. Earlier this month, the Congressional Budget Office testified before the committee that American workers have lost at least $2 trillion in retirement savings over past 15 months. The Center on Retirement Research also just reported that $2 trillion in value in traditional defined benefit plans has been lost in the last year.

At today's hearing, retirees testified that the combination of a falling market and rising costs have had a long-lasting impact on their families' retirement security. 

"The recent unstable financial crisis is having a devastating effect on my life," said Roberta Quan, a retired school teacher from San Pablo, Calif. who is also caring for her husband who has Alzheimer's disease. "A lifetime of savings in catastrophic decline is demoralizing. The bottom line is that I am retired and unable to re-earn lost funds."

Steve Carroll, a retired writer from Petaluma, Calif. agreed. "Our monthly budget has been severely depleted for life," Carroll said. "We still have our IRAs. But, as they are in mutual stock funds they are so far down in value that selling any of them right now, as the law requires of [my partner] Chuck, the loss would be an enormous percentage of the investment."

Current regulations require account holders of 401(k)-type account to withdraw a minimum amount of money every year after they reach 70 ½ years old. If seniors do not take out a minimum amount based on an Internal Revenue Service formula, they are subject to a 50 percent penalty. For instance, if an individual fails to withdraw $4,000, they would be assessed a $2,000 tax the next year.

"The current volatility, and the damage it has done, cannot be undone in the near term," said Mark Davis, a registered investment advisor. "Steps like a temporary repeal of minimum required distribution rules may help to alleviate some of the worst pain."

On October 10, Rep. Miller and Rep. Rob Andrews (D-NJ) called on U.S. Treasury Secretary Henry Paulson to suspend the tax penalty for retirees who are forced to make withdrawals but want to have additional time to rebuild their retirement savings.

Other witnesses highlighted problems with the current retirement security system where individually directed 401(k)-type plans have become a worker's main retirement savings vehicle. Where investment decisions were once made by professionals managing a traditional pension portfolio on behalf of workers, the responsibility of picking the right investments and implementing retirement savings strategies are left up to an individual account holder.

"The private retirement fortunes for all but today's oldest workers are dependent on the fate of 401(k)s," said Dr. Jacob Hacker, the co-director of the Center for Health, Economic, and Family Security at the University of California at Berkeley. "Even those who do contribute adequately tend to make common investing errors, like putting their money in low-yield bonds, neglecting to rebalance their accounts periodically, and over-investing in their own company's stock."

"Individuals have a tendency to buy at the peak, and then panic when the markets drop and sell at the bottom," said Dr. Shlomo Benartzi, a leading expert on 401(k) participant behavior and a professor at the Anderson School of Management at UCLA. "There is a real concern that individuals will repeat the same mistake during this market crisis and sell at the bottom and perhaps even stop contributing to their retirement plan."

The Education and Labor Committee passed legislation earlier in the year that would help workers shop around for the best retirement investment options by providing complete information on the fees taken from their retirement accounts. According to the Government Accountability Office, a 1 percentage point difference in fees can reduce retirement benefits by nearly 20 percent.

For more information on the "401(k) Fair Disclosure for Retirement Security Act" (H.R. 3185), click here.

For more information on Chairman Miller's request to Sec. Paulson, click here.

For more information on the PBGC, click here.

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