WASHINGTON, D.C. – Speaking at the 48th annual Investment Company Institute general membership meeting, ICI President Paul Schott Stevens addressed key issues concerning the $9.2 trillion mutual fund industry. Paramount among his concerns was the looming retirement wave. With Social Security careening toward insolvency and defined-benefit plans falling by the wayside, baby boomers collectively are ill prepared for their coming retirement. Getting more folks committed to 401(k) enrollment at a younger age is crucial, he says.
“The trend toward defined contribution is clear and irreversible,” Stevens told conference attendees who convened for his opening remarks. At the end of 2005, there were 47 million Americans participating in company 401(k) plans, four times as many participants than there were two decades ago, he noted.
But participation remains low. Forty percent of the nation’s employees have no retirement plan available to them, whether due to a lack of company resources or just the fact that they work for a start-up company struggling to keep its lights on. And among those who do have access, many of them are not taking full advantage of company matches or are not contributing enough for a comfortable retirement.
One of the ways the ICI hopes to increase the level of participation is by strongly advocating automatic enrollment. By forcing employees to default into some sort of modest contribution, it would provide a nudge for those who may not realize its urgency.
Another salve for poor attendance in 401(k) class, Stevens suggested, is to maintain savings incentives for participants by not allowing them to sunset. Rules governing IRAs and defined contributions aren’t permanent. Set to expire in 2010, these provisions had a huge impact on the rules governing 401(k) accounts. For example, they increased contribution caps, allowed for so-called “catch-up” contributions for older employees and established Roth 401(k) accounts.
In fact, Stevens ranks amending current retirement laws as one of ICI’s “top legislative priorities.” The group’s agenda for this year includes working closely with the House and the Senate to simplify the tax treatment for IRAs, which prior to 1986 enjoyed universal tax deductions. Today, IRAs are used primarily as a 401(k) rollover account, which doesn’t maximize investors’ saving potential, he says.
Another fix for the retirement problem is the passage of the Growth Act, which would effectively prevent fund shares from being taxed “instead of being nicked year after year,” Stevens said. Stevens further stressed the need for innovation and change amid stiff opposition from naysayers. “If [mutual funds] have thrived, it’s because they have been agents of change,” he said. Never has that been more important than now with a bulk of America’s population headed into their twilight years. “Our size and importance demands it.”