NEW YORK – Demos applauds the Department of Labor’s and Treasury Department’s announcements on Friday of several rule changes that would make it easier for some Americans to protect themselves against the risk of outliving their retirement savings when they retire. This announcement, as both Demos and the Council of Economic Advisors have reported, are a “small but crucial step”, with far more action needed to ensure that all Americans have the opportunity to retire with dignity after a lifetime of hard work.
The Treasury Department rules announced on Friday have the potential to help millions of Americans by making it easier for them to purchase annuities, or guaranteed lifetime streams of income. These rules would exempt annuities from the “required minimum distribution (RMD)” requirements of 401(k) plans, which require that 401(k) accountholders withdraw a set percentage of their accounts each year after 70 ½.
However, these rules will likely do little to address the extremely high fees that plague the annuity market, fees that have, according to the consensus among retirement experts, historically been a large reason people have shied away from purchasing annuities, opting to take on themselves the risk of outliving their retirement savings.
More retirement reform is desperately needed to provide all Americans with a safe, low-cost way to supplement their income from Social Security in retirement.
“These fees parallel the high and in fact excessive fees that characterize the private retirement market in general, fees caused by both lack of financial education and lack of true investment choice,” stated Robert Hiltonsmith, Policy Analyst for Demos’ Economic Opportunity Program. “Both problems will still persist after the Treasury’s rule changes, which is why more retirement reform is desperately needed to provide all Americans with a safe, low-cost way to supplement their income from Social Security in retirement.”
The Department of Labor also announced that implementation of new rules requiring more transparent disclosure of mutual fund fees in 401(k)-style plans would be pushed back to July 1. The rules require that retirement plans disclose in the front of participants’ quarterly statements the fees they paid, in both, percentage and dollar terms. These rules are a very welcome step in the right direction, and will likely prompt some plan sponsors to seek out lower-fee funds, and some mutual funds to lower fees. However, fee disclosure alone will not solve the problem of excessive mutual fund fees.
As Teresa Ghilarducci, Professor of Economics, Schwartz Center for Economic Policy Analysis at the New School for Social Research and a Dēmos Distinguished Senior Fellow, explains “Disclosing fees are a crucial step for savers to know what their true rate of return is on their accounts. But the disclosure does nothing to help savers get low fee, high performance investment managers. There is no magic link between knowing the fees and getting better and more efficient performance.”