Today, I chaired a U.S. House Committee on Education and Labor hearing in San Francisco where we examined how the current financial crisis is affecting retirement savings. Witnesses told us that 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. While this crisis may have started on Wall Street, it’s Main Street that stands to suffer the most. More than ever before, there is an urgent need to help Americans strengthen their retirement savings.We also learned today that U.S. Pension Benefit Guaranty Corporation 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.
Taxpayers subsidize 401(k) plans by $80 billion dollars annually. For a taxpayer investment of this size, we must ensure that the structure of 401(k)s adequately protects the nest eggs of participating workers.
At a minimum, we know that much greater transparency and disclosures in 401(k) investment policies are needed, to protect workers from “hidden” fees that could be eating deeply into their retirement accounts.
And with seniors poised to suffer the most from the current economic turmoil, we must suspend an unfair tax penalty for seniors who don’t take a minimum withdrawal from their depleted retirement accounts, like 401(k)s. We’ll push to enact legislation based on a bill Rep. Rob Andrews recently introduced, so that seniors who have seen their retirement savings evaporate don’t get penalized for trying to build those savings back up.
At the hearing today, we heard from Roberta Quan, a retired school teacher from San Pablo, CA, who is also caring for her husband who has Alzheimer’s: “The recent unstable financial crisis is having a devastating effect on my life. 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, CA, told us: “Our monthly budget has been severely depleted for life. 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.
Registered investment advisor Mark Davis told us that a temporary repeal of minimum required distribution rules could help some retirees. On October 10, Rep. Andrews and I 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 spoke about 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 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.
We started this investigation last week, as part of a series of hearings the House is conducting to investigate the causes of the financial crisis, and what additional steps are needed to protect homeowners, workers, and families.
Last week, Peter Orszag, the director of the Congressional Budget Office, told us that American workers have lost more than $2 trillion in retirement savings over the last fifteen months – an astonishing loss that could lead workers to delay their retirement.
Several experts also told us that workers closest to retirement could suffer the most from this financial tsunami. But while the housing and financial crises are intensifying retirement insecurity, we also know that workers’ retirement savings have been declining for quite some time. Rising unemployment, stagnating wages and benefits, and a shift away from more traditional defined-benefit pension plans have been making it much harder for workers to save for retirement while juggling other expenses.
Now, the number of investors taking loans on their 401(k) accounts is increasing. And hardship withdrawals are also increasing. T. Rowe Price estimates a 14 percent increase in hardship withdrawals just in the first eight months of 2008. And, all the signs point to an increased frequency of 401(k) loans and hardship withdrawals in the coming year.
As other committees’ hearings have revealed, many of the Wall Street titans responsible for this crisis have still escaped with their plush perks, lavish spa trips and golden parachutes intact. This is an outrage. For too long, the Bush administration anything goes economic policy allowed Wall Street to go unchecked.
As we look at how we can rebuild workers’ retirement savings and our nation’s economy, the Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people.
Being able to save for retirement after a lifetime of hard work has always been a core tenet of the American Dream. We can’t allow the promise of a secure retirement for workers to become a casualty of the financial crisis.
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