Senate Aging Committee Finds ‘Target Date Funds’
Among Obstacles to Secure Retirements
Sen. Kohl sends letters to Secretary of Labor Hilda
Solis, Securities and Exchange Commission Chairwoman Mary Schapiro,
urging an immediate review of target date funds; Hearing on
Long-Term Care services
March 2, 2009 – The crashing economy is wrecking
havoc among retired senior citizens in the U.S. and forcing many on the
brink or retirement to reconsider giving up their jobs. Witnesses at a
hearing of the Senate Special Committee on Aging last week offered
insight into many of the factors that are affecting retirees and the
ability of baby boomers to retire, including the weakened performance of
401(k) funds known as “target date funds,” the instability of housing
values, and the challenges of the labor market for older workers.
The hearing, chaired by aging committee chairman
Herb Kohl (D-WI), took a particularly close look 401(k) target date
funds, which are designed to gradually shift to more conservative
investments as workers approach retirement. Kohl unveiled findings from
a committee investigation of 401(k) funds designed for people planning
to retire in 2010, which revealed a wide variety of objectives,
portfolio composition and risk within same-year target date funds.
The study found results of excessive risk can be
devastating for those on the brink of retirement: one 2010 target date
fund lost 41 percent in 2008.
In conjunction with the hearing, Kohl sent letters
to U.S. Secretary of Labor Hilda Solis and U.S. Securities and Exchange
Commission Chairwoman Mary Schapiro, urging them to immediately commence
a review of target date funds and begin work on regulations to protect
plan participants.
“Despite their growing popularity, there are
absolutely no regulations regarding the composition of target date
funds,” said Chairman Kohl. “With more and more Americans relying on
401(k)s and other defined contribution plans as their primary source for
retirement savings, we need to make sure their savings are
well-protected with strong oversight and regulation.”
About Target Date Funds
What Does Target-Date Fund Mean? A
mutual fund in the hybrid category that automatically resets the
asset mix (stocks, bonds, cash equivalents) in its portfolio according
to a selected time frame that is appropriate for a particular investor.
A target-date fund is similar to a life-cycle fund except that a
target-date fund is structured to address some date in the future, such
as retirement.
Investopedia explains Target-Date Fund
These funds have become popular with 401(k) plan investors. While
proponents cite the convenience to investors of putting their
investing activities on autopilot in one fund, critics are wary of
these funds' one-size-fits-all approach.
Target date funds are designed to simplify
long-term investing by automatically adjusting to more conservative
investments as the fund approaches a set date. By authority of the
Pension Protection Act of 2006, the U.S. Department of Labor (DOL) has
issued regulations allowing target date funds to be used as a qualified
default investment alternative (QDIA) in employer-sponsored retirement
plans.
However, under the Employee Retirement Income
Security Act (ERISA) and DOL guidelines, there are no requirements
regarding the composition of target date funds and the appropriate ratio
of stocks and bonds as the fund nears its target.
As a result of the decision to allow target date
funds to be used as QDIAs, they are increasingly used as the primary
investment option for millions of Americans.
Target date funds only made up roughly 3 percent of
defined contribution savings in 2006, but are expected to increase to 20
percent in 2010. By 2015, it is expected that more than one-third of
all defined contribution savings will be in target date funds.
The hearing’s lead witness, Jeanine Cook, testified
about the difficulties Americans face as they head into retirement.
Like millions of other Americans, she has experienced a decline in her
housing and 401(k) investments in conjunction with diminishing job
prospects.
Dallas Salisbury, president and CEO of the Employee
Benefits Research Institute, highlighted some of the findings about
target date funds that will be released in their March 2009 EBRI issue
brief. He also discussed calculations about how long boomers will need
to remain in their 401(k) plan to make up for the 2008 declines based on
continued contributions and differing market scenarios.
Aging Committee to Hold Hearing March 4 on
Long-Term Care Services
On Wednesday, March 4, U.S. Senate Special
Committee on Aging Chairman Herb Kohl (D-WI) will hold a hearing to call
for the inclusion of improvements to long-term care services and
supports as part of emerging blueprints for national health reform.
A member of the Obama Administration from the
Department of Health and Human Services (HHS) will participate as the
Committee considers how to improve the country’s current scattered
system of long-term care services and supports, while also working to
ensure that they are cost-effective.
Witnesses are expected to call for targeted changes
to Medicare and Medicaid, as well as broader changes in the context of
national health care reform discussions.
The hearing, “Health Reform in An Aging America,”
will open at 10 a.m. in room 562 of the Dirksen Senate Office Building.
Expected to testify are the following:
● Thomas Hamilton, Centers for Medicare and
Medicaid Services
● Karen Timberlake, Secretary, Wisconsin Department of Health Services
● Holly Benson, Secretary, Florida’s Agency for Health Care
Administration
● Henry Claypool, Washington Liaison for the Paraprofessional Health
Institute
● Melanie Bella, Senior Vice President for Policy, Center for Health
Care Strategies
● Judy Feder, Senior Fellow, Center for American Progress
Dean Baker, co-director of the Center for Economic
and Policy Research (CEPR), discussed the decline in savings and equity
among young and older baby boomers. In conjunction with this hearing,
CEPR released a new report on how the housing crash is affecting
boomer’s retirement prospects.
Ignacio Salazar, from SER- Jobs for Progress,
testified about some of the challenges that older workers face in
today’s workforce, and how Workforce Investment Act (WIA) one-stop
career centers are not doing a satisfactory job in training seniors.
Earlier in the week, Kohl unveiled his agenda to
make it easier for older Americans to either re-enter or remain in the
workforce. (See below this news report.)
Barbara Kennelly, of the National Committee to
Preserve Social Security and Medicare, testified about how government
programs, like Social Security and Medicare, are crucial to America’s
seniors, especially in a stagnant economy. She also mentioned the
rising bankruptcies among seniors and highlighted some of the
government’s efforts in the stimulus to help older Americans as they
retire.
Finally, Deena Katz, a certified financial planner
and associate professor at Texas Tech University, gave an overview of
boomer financial history, and described the challenges and risks facing
boomers as they enter retirement and begin to spend down their savings.
She also offered steps that boomers and policy makers might consider to
help attain a secure retirement.
For the complete testimony of members and
witnesses, click on the links below.
●
Jeanine Cook, Baby Boomer, Myrtle Beach, SC
●
Dallas L. Salisbury, President & CEO, Employee Benefits Research
Institute, Washington, DC
●
Dean Baker, Co-Director, Center for Economic and Policy Research,
Washington, DC
●
Ignacio Salazar, President & CEO, SER - Jobs for Progress,
Washington, DC
●
Barbara B. Kennelly, President & CEO, National Committee to Preserve
Social Security and Medicare, Washington, DC
●
Deena Katz, CFP, Associate Professor, Texas Tech Univeristy, and
Chairman, Evensky & Katz, Coral Gables, FL
Three Bills Rolled Out to Help Senior Citizens
Continue in Workforce if Necessary
U.S. Senator Herb Kohl (D-WI), Chairman of the
Senate Special Committee on Aging, was joined on February 24 by several
of his colleagues in the introduction of three bills to make it easier
for older Americans to either reenter or remain in the workforce.
In conjunction with their introduction, Kohl
released the results of a
study conducted by the U.S. Government Accountability Office (GAO)
on the federal government’s efforts to hire and retain older workers,
and what policy changes would help them do it better. Over the next five
years, more than half a million permanent full-time federal employees—or
about one-third of the full-time federal workforce—will be eligible to
retire. In ten years, more than 60 percent of the federal workforce will
be retirement-eligible.
“The state of our economy has millions of older
Americans considering all their options. For a lot of them, the downturn
will mean working longer,” said Chairman Kohl. “These policies provide
commonsense incentives and simple fixes to make it easier for those who
want to keep working past retirement age.”
To conduct the study, GAO reviewed three federal
agencies that have large proportions of employees nearing retirement,
and found that each relies on older workers in different ways, whether
in the training of newly hired staff or as short-term contractors.
The study also drew upon the most promising
practices within other agencies for relying on older workers. In the
report, GAO recommends that the Office of Personnel Management (OPM)
facilitate the communication and broad dissemination of the most
successful strategies that have been employed throughout the government,
so that more agencies can institute them.
Tomorrow, Chairman Kohl will hold a hearing to
examine how the poor economy is affecting those nearing retirement. The
hearing, entitled “Boomer Bust? Securing Retirement in a Volatile
Economy,” will feature testimony on the labor market for older workers,
the challenges they face, and the need of many older Americans to
continue working.
The legislation being introduced last week included
the following:
The Older Worker Opportunity Act of 2009,
sponsored by Senators Kohl and Dick Durbin (D-IL).
Many older workers seek workplace flexibility in
order to pursue hobbies or visit the grandkids, and many need
flexibility to care for a loved one. This bill would diminish the
barriers to part-time work for older workers, such as loss of health
coverage and decreased pension benefits, by providing a tax credit for
employers that employ older workers (age 62+) in flexible work
programs.
The credit equals 25 percent of an older worker’s
wages, and expires after 2012. To be eligible, employers must (1)
provide a qualified pension plan and (2) provide health insurance
coverage and pay at least 60 percent of its cost. A “flexible work
program” provides a full- or part- time flexible work schedule and full
pension and health care benefits.
This arrangement must be available to an older
worker for at least one year and must be widely available to rank and
file employees.
A bill to make it easier to rehire federal
annuitants, sponsored by Senators Kohl and Susan Collins (R-ME).
This bill would allow the federal government
to rehire federal retirees part-time, without forcing the employee to
reduce their salary by their pension amount, as under current law. While
the individuals would receive both salary and annuity payments, they
would not be considered employees for the purposes of retirement and
would receive no additional retirement benefits based on their service.
A bill to allow phased retirement for federal
employees under the CSRS, sponsored by Senators Kohl and George
Voinovich (R-OH).
This legislation would change the computation of
Civil Service Retirement System (CSRS) annuities involving part-time
service by correcting an anomaly that creates a disincentive for
employees nearing the end of their careers who would like to phase into
retirement by working part-time.
Specifically, the legislation would clarify that
CSRS annuities, based in whole or in part on part-time service, should
be pro-rated for the period of service that was performed on a part-time
basis. The correction allows agencies, as part of their succession
planning efforts, to retain the expertise of senior staff who wish to
work on a part-time basis at the end of their federal careers.
Last month, Kohl and Durbin reintroduced the Health
Care and Training for Older Workers Act of 2009 (S. 281), which would
extend COBRA health insurance from the time of retirement (ages 62 and
up) until seniors become eligible for Medicare at age 65.
The bill also improves access for seniors to
federally-funded job training programs. Finally, the bill would
establish through the Department of Labor a clearinghouse of best
practices in the private and public sectors for hiring and retaining
older workers, as suggested by the GAO’s report on the Comptroller
General’s Forum on Engaging and Retaining Older Workers, released in
February 2007.
For more information on the Aging Committee’s April
2008 hearing on the federal government’s efforts to hire and retain
older workers, click here: http://aging.senate.gov/record.cfm?id=297184
Keep up with the latest news for senior citizens, baby
boomers
March 2, 2009 – The crashing economy is wrecking
havoc among retired senior citizens in the U.S. and forcing many on the
brink or retirement to reconsider giving up their jobs. Witnesses at a
hearing of the Senate Special Committee on Aging last week offered
insight into many of the factors that are affecting retirees and the
ability of baby boomers to retire, including the weakened performance of
401(k) funds known as “target date funds,” the instability of housing
values, and the challenges of the labor market for older workers.
