Changes Coming for the 401(k) Plan

By JENNIFER LEVITZ

Policy makers and some industry representatives say major changes to retirement investing and 401(k) plans are becoming increasingly likely under the Democratic Party's control of Congress.

Proposed legislation gaining momentum in the House and Senate would require the industry to break out 401(k) fees on investors' statements, and would essentially repeal Bush administration regulations allowing mutual-fund companies to offer personalized advice to 401(k) participants in the plans the companies manage.

In another proposed change, President Obama's 2010 budget calls for the future establishment of a program in which all workers would be automatically enrolled in employers' retirement plans. Now, in most cases, they must opt in to participate. Also under the administration's plan, employers that don't offer a retirement plan would be required to enroll their employees in a direct-deposit individual retirement account. Employees would be able to opt out of either approach.

"We'll definitely see changes in the 401(k) plan," said Rick Meigs, president of 401khelpcenter.com LLC, a Portland, Ore., nonpartisan group that tracks retirement-investment trends.

Ed Ferrigno, of the Profit Sharing/401(k) Council of America, an industry group, said one fear is that more regulatory requirements will increase costs, and thus reduce services, for workers.

While the effort to revamp 401(k)s is being driven by Democratic legislators and labor groups, a few financial-service companies -- including Power Financial Corp.'s Putnam Investments and Barclays PLC -- have begun offering their own proposals. The 401(k) has become the primary savings vehicle for 60% of workers but has been under scrutiny as workers lost $2 trillion in the market downturns, including traditional pension plans.

ROBERT REYNOLDS

The crisis has shown "holes" in 401(k)s, but "there's a real opportunity here because of what happened to make the system even better," said Robert Reynolds, Putnam's chief executive, who said he will call for 401(k) overhaul at a Washington industry summit being held by the industry news service 401kwire.com on Wednesday.

Mr. Reynolds's proposal would curb equities in target-date funds; offer more tax incentives for workers and employers who participate in plans; and create government-insured annuities or similar products that would provide an income stream in retirement.

"The real negative that's come out," he said, is the "volatility" of many investments in 401(k) accounts, and the resulting strain on people who are close to retirement. Under his plan, a new national fund, regulated at the federal level and paid for by the industry, would back up lifetime income guarantees from insurers -- similar to the Federal Deposit Insurance Corp.'s protection of bank deposits.

"That's certainly an idea that is meaningful," said Tom Modestino, senior analyst with Cerulli Associates. Mr. Modestino said the idea is a carryover from the guarantees offered in traditional pension plans, and that he expects similar proposals "looking at whether there's a better way to protect 401(k) savings, or give them some kind of floor."

Mr. Reynolds also supports the controversial fee-disclosure legislation, introduced by Rep. George Miller (D., Calif.), chairman of the House Education and Labor Committee. Barclays has testified in support.

The bill died in the Senate last year.

Source: http://online.wsj.com/article/SB124157445463990333.html

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