Congressional gridlock keeps DC industry off the legislative agenda

Political and legislative gridlock in Washington means bad news for the economy but not-so-bad news for the defined contribution industry, keynote speakers told attendees at Pensions & Investments' West Coast Defined Contribution Conference in San Francisco held Oct. 30-Nov. 1.

“What better way to give us all a fright than to talk about Washington,” said James M. Delaplane Jr., the Washington-based principal in government relations for Vanguard Group, who took the gridlock-is-good approach in his day-after-Halloween address.

“Almost all of the focus in Washington will be on big-picture issues like the deficit and debt,” Mr. Delaplane said. Thanks to “significant partisan paralysis,” he predicted there would be “relatively little” legislative activity affecting the retirement industry until after the 2012 presidential election.

Mr. Delaplane said the so-called supercommittee probably will not have much impact on the retirement industry. This is the committee of 12 U.S. senators and representatives trying to find ways to reduce the federal deficit. It is supposed to recommend cutting future deficits by at least $1.2 trillion over the next 10 years, and it faces a Nov. 23 deadline.

Although Mr. Delaplane doubted the committee would go after tax incentives aiding the DC industry, he said it might recommend imposing higher premiums paid by defined benefit plans to the Pension Benefit Guaranty Corp.

The supercommittee “won't make hard choices,” said Neel Kashkari, managing director and head of new investment initiatives at Pacific Investment Management Co. LLC, Newport Beach, Calif., who said congressional inaction — or weak action — will hurt the economy in the long run.

He bemoaned the lack of cooperation among political parties in Congress, calling the recent debt-ceiling crisis an “embarrassment for our country.”

One recent example of both parties coming together, he said, was when Democrats and Republicans “agreed to legislation that stabilized the economy.” The Troubled Asset Relief Program was signed into law by President George W. Bush in October 2008. Mr. Kashkari supervised TARP as assistant secretary of the treasury for financial stability.

“The economy had a debt-induced heart attack” in 2008, said Mr. Kashkari, likening the economy to an obese patient who keeps putting on weight. In this analogy, extra debt equals extra weight. “We stabilized the patient,” said Mr. Kashkari, referring to TARP, “but the patient is still on the gurney and is still obese.”

A major source of the financial obesity is entitlement spending — for Medicare and Social Security — that is expected to continue to grow at unsustainable rates, Mr. Kashkari said. He favors means testing for entitlements as one treatment for financial obesity, adding that both Democrats and Republicans find the concept objectionable for different reasons. Other possibilities are raising the retirement age or raising revenue by increasing taxes.

Mr. Kashkari said he doesn't expect Congress to take much forceful action until after the 2012 presidential election — and even then he isn't sure how decisive Congress will be. Despite his concerns about Congress, Mr. Kashkari said he is “not bearish” on the U.S. “Every country has as many challenges — or more challenges,” he said.

Still debated

One retirement challenge still being hotly debated is the use of lifetime income options embedded in defined contribution plans. The topic popped up at several sessions as consultants and some executives of large DC plans expressed concerns.

“We're not satisfied totally with what's in the marketplace,” said L. Wayne Adams, director of investment policy for AT&T Management Services LP, Dallas. “We continue to look at it.” AT&T has approximately $31.billion in defined contribution assets.

Mr. Adams said he is concerned about the cost of a lifetime income option embedded in a 401(k) plan, an opinion shared by Gretchen Tai, chief investment officer of Hewlett-Packard Co., Palo Alto, Calif. Her company, which has about $14 billion in DC assets, reviewed lifetime income options a few years ago but found them “not economically beneficial,” she said.

Consultant Jacob O'Shaughnessy from the Portland, Ore.-based investment advisory firm Arnerich Massena Inc., noted that companies froze their defined benefit plans partly to reduce long-term liabilities. Adding a lifetime income option such as an annuity embedded within a 401(k) will increase long-term liabilities, he said.

Pamela Hess, director of retirement research at Aon Hewitt, Lincolnshire, Ill., said she continues to hear from sponsors that they are afraid of liabilities and that they want more guidance from the Department of Labor.

But Chip Castille, whose company has a lifetime income option product, said the cost of waiting is greater than the cost of acting. As for sponsors' worrying about such products, “we heard the same concerns when target-date funds came out,” said Mr. Castille, managing director and head of BlackRock (BLK) Inc. (BLK)'s U.S. and Canadian defined contribution business.

Although lifetime income options haven't made big inroads in large DC plans, some large plans are taking other — sometimes dramatic — steps to innovate.

Consultant Philip Edwards cited an example of a client with a $3 billion asset plan that didn't appear to need much improvement because it already had a 90% participation rate. Still, the client, which he declined to name, initiated a significant investment lineup change this year, said Mr. Edwards, a principal with Curcio Webb LLC, Pennington, N.J.

Originally, the plan had 41 investment options with three options accounting for more than half of the plan assets and with target-risk funds representing less than 10% of assets. The plan trimmed its lineup to a customized target-date fund, seven core options, a company-stock option and a self-directed brokerage window.

Executives of plans that have initiated investment lineup reorganizations in recent years identified brokerage windows as a way to allow some investors a wider variety of choices while at the same time simplifying the choices for the vast majority of participants.

Several speakers warned that despite the current slow-growth, low-interest rate environment, plan executives must beware of inflation and must use multiple investment weapons to cope with it.

Treasury inflation-protected securities alone “won't save you from inflation,” said Rick Wurster, vice president and asset allocation portfolio manager for Wellington Management Co. LLP, Boston. He said commodities and inflation-sensitive equities, such as precious metals and mining stocks, should be part of the equation.

Despite the concerns about inflation, or congressional inaction or participant inertia, there should be cause for optimism, said Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, Washington. Offering several slides of data on savings rates and behavior, Mr. Salisbury told the audience: “Employment-based programs make the difference.”