Retirement Plans: Let's Clear the Maze


By Ellen Hoffman Last week more than 200 top government and financial-services executives, consumer educators, and representatives of think-tanks took part in the National Summit on Retirement Savings. They spent the better part of two days trying to devise slogans and advertising campaigns that would convince a greater number of Americans to save more money for their retirement.

The results of their deliberations at the congressionally mandated meeting in a Washington (D.C.) hotel included recruiting Barbara Bush as the spokesperson for a media campaign on retirement savings and transforming the Fourth of July into a celebration of financial independence from the oppression of credit-card debt. These and other proposals will be compiled into an official, written report to be released in about three months. But is a Madison Avenue-type campaign really the answer to America's retirement-savings crisis?

This summit -- the second of three required by a bill enacted in 1997 -- occurred at a time when interest in and concern about America's pension and retirement systems are probably at an all-time high. Yet the word Enron hardly escaped the lips of the government officials and politicians who addressed the summit -- and the issue of the system's complexity wasn't on the agenda.

MIND-NUMBING OPTIONS. While slogan contests were the order of the day at the summit downtown, the real action was on Capitol Hill. There, a platoon of experts was testifying to the Senate Finance Committee and the House Committee on Education & the Workforce. The gist of their testimony? That the failings of the pension system could be remedied by enacting yet another series of complex amendments and formulas that would make the task of financial planning for retirement even more mind-numbing than it already is.

Plenty of evidence suggests that instead of -- or at least in addition to -- a marketing blitz, what average Americans need to make adequate financial preparations for retirement is a system they can understand with a reasonable amount of effort.

A chart drawn up by financial planner Ric Edelman illustrating the steps and choices required to contribute to an IRA is a maze of close to 150 interconnected boxes. The one on withdrawals is almost as dense. As I do interviews for articles on retirement, I frequently encounter people who think an IRA is a type of investment, such as a mutual fund, rather than an account into which they can put many different types of investments. I'm amazed at the number of otherwise intelligent and responsible workers who have mindlessly left behind a 401(k) at an old job, or have no idea what their investment options are for the account at their new job.

"UNSOPHISTICATED." The Retirement Confidence Survey, an annual poll sponsored by the American Savings Education Council (a government/private-sector group that promotes savings) and the Employee Benefit Research Institute (a research group), found that in post-Enron January, 2002, only about 32% of Americans have even tried to calculate how much money they need for retirement. That's a decline from a high of 51% only two years ago. You can read the survey results on the institute's Web site.

And as U.S. Comptroller General David Walker said in his testimony to the Finance Committee, "numerous studies...[make it] clear that, among those who save through their company's retirement programs or on their own, large percentages of the investing population are unsophisticated and do not understand the risks associated with their investment choices." His testimony is on the committee's Web site.

Could it be that a major reason people aren't making retirement calculations, managing their accounts properly, and saving enough for retirement is that the system has become encrusted with so many options and rules that they simply can't figure out the best thing to do?

"DISINCENTIVE." One person who thinks so is Paul Weinstein Jr., a consultant to the Promontory Financial Group in Washington, D.C., and a senior fellow at the Progressive Policy Institute, a research and education think-tank in the capital that promotes "progressive policies." He also served as chief of staff for domestic policy in the Clinton White House. Weinstein points out that "there are some 16 different types of tax-favored retirement accounts. The very complexity of the current system provides a disincentive to those who want to participate."

Weinstein cites a survey of small-business owners that found only 17% were even aware of the various retirement programs created specifically for their employees. "It's intimidating and deters people from participating," he says. "People think they are not eligible, or that there's some rule that will make them ineligible, or they can't afford an accountant or a lawyer to help them figure it out."

So Weinstein has come up with an intriguing proposal that -- unlike other, recent attempts -- would truly simplify the system and yet preserve most of its benefits. His idea is to create a "universal pension" (UP) to replace all of the existing individual retirement accounts (traditional and Roth IRA's, simplified employee pensions for the self-employed, SIMPLE plans for small businesses, etc.) with the same new type of account for every American.

WHAT'S UP? Many of the rules governing the UP would be familiar: Contributions would be tax-deferred, there would be penalties for early withdrawals, and you'd have to start taking money out when you reach age 70 1/2. What's new: Every American would receive $500 from the government to start such an account, people would be able to better diversify retirement investments by diverting money from their 401(k)s or similar employer plans into the UP once it's vested, and they could transfer money from any employee retirement plan into the UP when they change jobs.

Weinstein says both employers and employees would have less paperwork with a UP system, and participants would pay fewer fees to maintain financial accounts. (You can read a description of the proposed UP accounts on the Progressive Policy Institute's Web site.) At least one congressional leader seems to think the UP idea has some merit. House Minority Leader Richard Gephardt has announced that he plans to introduce a bill that would authorize the new system soon.

Just think what could happen if the experts at the "Saver Summit" and policymakers on the Hill addressed basic issues such as how to truly simplify a system that Weinstein says, for most people, is "incomprehensible." In the future, retirement savings would be as much a part of Americans' financial mindset as Social Security, and we would no longer need either a "Savings Summit" or media campaigns to convince us to take control of our own futures. Hoffman writes Your Retirement twice a month, only for BusinessWeek Online


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