The Wall Street Journal
By: Robert Powell
January 30, 2010
Obama's Plan Seen as Going Only So Far in Offering Workplace-Based Initiatives
Good, but not enough. That is how academics and financial advisers characterize President Obama's plans to help Americans save more for retirement.
Mr. Obama wants to expand tax credits that reward retirement savers, and he seeks to require that all employers provide workplace-based retirement savings plans, or automatic individual retirement accounts.
Many of the measures are based on sound research conducted by renowned behavioral finance professionals, and they will help middle-class Americans, some observers said. But some also said the measures don't go far enough, and the plans ignore other equally large, if not larger, financial issues. Their take:
• Expanding the Saver's Credit: The Obama administration is proposing to expand and simplify the saver's credit, which allows a person to shave money off his or her tax bill, linked to donations to a retirement account. The lower the income, the higher the credit, 50% of donations up to $2,000 for singles earning up to $16,750 and $33,500 for married people filing jointly. The credit phases out at $27,750 for singles and $55,500 for married joint filers. Taxpayers at that upper end get only a 10% credit.
Mr. Obama wants to give a flat 50% credit for the first $1,000 of contributions to retirement plans by families earning up to $65,000 and provide a partial credit to families earning up to $85,000. The administration also wants to make this tax credit refundable even if the taxpayer has no income-tax liability.
To Jodi DiCenzo of Behavioral Research Associates, those measures would go a long way toward promoting retirement security. But, she said, other problems are left unaddressed: the process by which taxpayers claim the credit and the fact that not enough people are aware it exists.
"The proposal simplifies the calculation, but does it simplify the hoops that taxpayers have to jump through to claim the credit?" Ms. DiCenzo said. Research shows that 34% of all eligible taxpayers who could have claimed the credit didn't.
Other research, released by Transamerica in 2008, showed that more than 80% of American workers with household incomes less than $50,000 weren't even aware of the saver's credit.
Ms. DiCenzo would like to see the credit become automatic and immediate "because immediate incentives are more effective than ones that are delayed."
• The Automatic IRA: Mr. Obama wants employers who don't offer a retirement plan to enroll employees in a direct-deposit IRA unless the employee opts out. Such a plan would, in effect, create employer-sponsored retirement plans for 78 million workers, the roughly 50% of working Americans who now don't have a plan at work.
Under the plan, workers would automatically have 3% of pretax earnings go into an IRA. The worker could increase the amount of the automatic deposits or opt out altogether. The money would either be placed into a diversified portfolio or the worker would have the option to invest that money as he or she sees fit.
The trouble is many people don't know how to invest wisely, said Gregory G. Seals, director of fixed income and behavioral finance at the CFA Institute. So everyone should be required to be in the diversified portfolio, he said.
• Updating 401(k) Regulations: The administration also is calling for improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping and other services at a fair price. Moreover, Mr. Obama wants to promote the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income.
While welcoming Mr. Obama's ideas, Norman Ehrentreich, the owner of Ehrentreich LDI Consulting & Research, said they fail to meet the problem of the declining defined-benefit pension plan, in which workers get a payment from a pension pool that their employer funds. This type of pension is going away, in favor of plans like the 401(k), which require workers to put away their own money, perhaps matched by employer's contributions. "Many Americans do not save enough to maintain their desired standard of living in retirement," he said.
• What's Missing: The administration's plan falls short by not trying to fight financial ignorance, said Annamaria Lusardi, a Dartmouth College professor and director of the Financial Literacy Center. By promoting financial education, she said, "People can make sound decisions not only about pensions but also mortgages, annuities and how to invest their pensions and to avoid the mistakes we have witnessed in this crisis."
Yet others take a broader view, contending that improving the economy is the best way to bolster retirement planning.
"No job, no retirement...These measures are like putting bandages on a patient dying of a heart attack," said Mark Matson, founder and chief executive of Matson Money, a financial adviser. Ending all entitlement programs and encouraging personal responsibility would help, he said.