State Street sees 'urgent need' for better retirement regulations

A new report from State Street Corp. says the continuing shift to defined contribution plans from defined benefit plans creates “an urgent need to consider how improved regulatory approaches could benefit the pensions sector.”

The report, “Pension Visions: Strengthening The DC Model for the Future,” says “recent shifts in the financial environment offering compelling reasons for governments and regulatory authorities to address the potential impact” on retirement plans.

However, the Boston-based financial services firm isn't recommending a drastic overhaul of regulation or legislation. Neither the report nor State Street executives who were interviewed for this story are endorsing — or opposing — specific legislation or regulations now being considered in Washington. Instead, the State Street report offers suggestions to adjust current laws and regulations.

Lee Jones, senior vice president of State Street, Boston, said in an interview the industry might benefit from refinements to the Pension Protection Act of 2006 that would “further define the boundaries of who should provide investment advice” to DC plan participants.

“Among the list of DC-related issues that merit regulators' attention,” the State Street report said, “are enhanced risk management and governance, including questions of disclosure and conflicts of interest.”

Lamenting that participants don't save enough, the State Street report said “government authorities may want to consider improved incentives, increased access, better tools for evaluating risk, strengthened rules for enhanced disclosure and transparency and renewed emphasis on investor education.”

Although the report suggested “further tax incentives” as one way to encourage participants to set aside more money for retirement, Mr. Jones noted that “understanding the deficits of today, that plan isn't a viable one right now.”

Mr. Jones was a contributor to the report along with Jamie Kase, executive vice president and head of global sales and marketing for State Street Global Advisors. In an interview, Mr. Kase said the industry could do itself a favor by making improvements before government tells it what to do.

“More regulation is not warranted provided that we as an industry have transparency around our cost structures, have articulated our investment thesis and have an asset allocation process that mirrors our investment thesis,” he said.

The State Street report sees plenty of room for improvement in fiduciary oversight. Citing an October 2009 report by Mercer LLC on private and public pension system integrity, State Street notes that the U.S. ranked below average and seventh among 11 countries surveyed.

“In the run-up to the crisis, the record asset growth enjoyed by many plans obscured conventional governance issues,” the State Street report stated. “However, in hindsight, events of the past two years suggest that it may be time to revisit the subject of fiduciary oversight and assess its effectiveness.”

State Street said its concern was prompted because “low levels of investor understanding are proving to have significant consequences when pension policies increasingly rely on shifting responsibility to plan participants.” As the shift to DC plans from defined benefit puts more responsibility on plan participants, the State Street report stated “the commonly understood meaning of the fiduciary role has blurred to some degree.”

The common theme in the State Street report of revising regulation, improving fiduciary oversight and developing new DC plan models is that “individuals cannot be relied upon to plan their optimal retirement funding alone.” The pressure, the report concludes, is on the financial services industry to make sure an aging population has a “decent quality of life in retirement.”