US Mandatory Retirement Bonds: A Sign Of Times To Come?

by Leroy Baker, Tax-News.com, New York

15 January 2010

Bloggers are reacting with suspicion to Bloomberg reports that the US administration is considering measures to encourage American retirees to convert their pension funds into annuities.

Bloomberg says the US Treasury and Labor Departments are preparing proposals to promote the conversion of 401(k) savings and Individual Retirement Accounts (IRAs) into annuities or other steady payment streams, and these are to be spearheaded by Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry.

Following a dramatic fall in pension fund asset values, national savings have taken an even greater turn for the worse as workers increasingly opt to receive lump-sum pension distributions as opposed to annuities. A July 2009 report from the Retirement Security Project, a joint venture of Georgetown University’s Public Policy Institute and the Brookings Institution in Washington, suggested that only 2% of 401(k) plan participants convert retirement savings into an annuity on retirement.

The skepticism among bloggers surrounding these proposals is that the expected tightening up of tax benefits surrounding 401(k) retirement schemes has less to do with the welfare of retirees and more a matter of concern over how the burgeoning government deficits can be financed; doomsday commentators call this a slippery slope towards enforced retirement savings. It is suggested that the government is already considering this option and it even has a name: "R bonds."

"Retirees do not want mandates related to account draw down in retirement. Survey respondents overwhelmingly believe retirees should be able to make their own decisions about how to manage their assets in retirement, with 70% opposed to the concept of a mandated annuity or government payout," said a new research report, "Enduring Confidence in the 401(k) System: Investor Attitudes and Actions," just released by the Investment Company Institute (ICI).

"Savers want choice and control. Among DC account–owning households, 98% said it is important to them to have choice in and control of their retirement plan investments. Some lawmakers have questioned the public-policy value of the tax benefits for people investing in retirement accounts," the ICI said in the report. The ICI survey was based on a telephone survey of 3,000 households from November 20 to December 20, 2009.

Retirement account participant data gathered for the report indicated that investors’ overall positive sentiments about the 401(k) are matched by their actions. Through the third quarter of 2009, six of 10 Vanguard 401(k) plan participants had account balances similar to or larger than those of two years ago, despite the dramatic decline in stock prices during that period. Recovery had been even stronger among participants who held target date funds in their plans: seven of 10 of these participants had seen their account balances recover.

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