House Committee Hears Testimony on Changes to Defined Contribution

Novemeber 24, 2008

A Congressional hearing in October that focused on the impact of the financial crisis on workers' retirement security included testimony from several witnesses on 401(k) plans and IRAs who suggested ways the savings plans could be changed.

House Education and Labor Committee members expressed interest in overall reform of the retirement system and questioned if more independent investment advice was needed. Rep. Mark Souder, (R-IN), said investors needed more information on risk from retirement plan sponsors and providers. Other members questioned the value of active investment management and advocated more fee disclosure.

Among those testifying at the hearing, entitled "Impact of the Financial Crisis on Workers' Retirement Security," were Christian Weller, a senior fellow at the Center for American Progress, Jack VanDerhei, research director at the Employee Benefit Research Institute, and Teresa Ghilarducci, a professor at the New School for Social Research.

Weller told the committee he did not approve of proposals to increase liquidity in 401(k) type plans despite concern expressed by Rep. Yvette D. Clarke, (D-NY), that during a downturn in the economy such as this one, investors might want to tap their retirement plans for income. Weller was also critical of the Pension Protection Act because he said it made defined benefit plans less attractive to employers.

VanDerhei supported greater use of target date mutual funds as a solution to workers who have over-invested in equities. He said EBRI is analyzing target date mutual funds in light of the recent downturn in the stock market and its impact on retirement savings.

Ghilarducci has proposed replacing existing defined contribution plans and IRAs with a universal, government-administered, defined contribution plan because the current plan favors individuals in the highest tax brackets. Under her proposal, exclusions from income, a key feature of 401(k)s and IRAs, would be replaced with a $600 tax credit. Both employers and employees would be required to share equally in a 5 percent contribution to this new plan.

While Ghilarducci's proposal has drawn interest among lawmakers, Committee Chairman George Miller, (D-CA), said recently he had no plans to introduce her proposal nor has he endorsed it. Neither the House Ways & Means Committee, nor the Senate Finance Committee, each with jurisdiction over tax issues, has held hearings on the issue nor publicly discussed the Ghilarducci proposal.