-----Original Message----- 

From: girardinmalibu@charter.net [mailto:girardinmalibu@charter.net] 

Sent: Friday, February 05, 2010 5:06 PM 

To: EBSA, E-ORI - EBSA 

Cc: girardinmalibu@charter.net 

Subject: RIN 1210-AB33 request for comments on retirement security 

Please see the attached web link and text, which appeared in public at 

Governing.com's web site, for fresh thoughts on how to provide lifetime 

income for individual citizens through a pension exchange. 

I stand ready to assist Treasury upon request, and have served 

previously as an advisor (Dave Walton, on arbitrage regs) and the White 

House (advisory commission on historically black colleges). 

Girard Miller 

310.795.1354 

http://www.governing.com/column/seeking-security-retirement-funds

Pension-exchanges for IRAs and 401(k)s would strengthen President 

Obama's initiatives. 

By Girard Miller | February 4, 2010 

 

News reports indicate that the U.S. Treasury and the Department of 

Labor will soon begin soliciting ideas for how to provide retirement 

income security to IRA and 401(k) investors. The agencies' request for 

public comments reflects a continuing interest in this topic by Mark 

Iwry, the Treasury's top gun in the retirement field and a respected 

expert in retirement plan design and taxation. Iwry has himself written 

on the topic in his private life before joining Treasury Secretary 

Timothy Geithner's team. The Obama administration linked this idea to 

its State of the Union initiatives to enhance Americans' retirement 

security, so the idea already has some White House buy-in. 

The idea of providing a secure lifetime income stream for IRA and 

defined contribution plan investors gained momentum after the market 

plunge of 2008 turned 401(k) plans into "201(k)" plans. Even with the 

recent stock market rally, they are still only "301(k)" plans, because 

most investors are still down 25 percent from their peak levels in the 

2007 stock market. Providing stable retirement income for a lifetime is 

just something that a mutual fund, corporate bond or bank CD cannot 

promise. 

The primary lobbyists for converting these tax-advantaged accounts into 

lifetime annuities are insurance companies, of course. They stand to 

gain the most, as federal encouragement to convert big account balances 

into annual income payments would drive millions of customers their 

way. These insurance companies expect to make a profit to compensate 

them for the risk of underwriting losses that can result from 

misjudging life expectancies or investing in assets that underperform 

the required rate of return to pay off the annuities. The problem for 

Obama's team and the Democrats in general is that these insurance 

companies are close cousins of those who fought them on health care 

reform. 
Opponents of this retirement security initiative will include mutual 

funds, the defined contribution investment community, banks and others 

who profit from large personal retirement accounts that are 

individually invested. 

(As a side note, a covey of blogsters are convinced that the Treasury's 

request for comments is a smokescreen for a conspiracy to convert IRAs 

into worthless government bonds in an Argentine-style maneuver to bail 

out the U.S. Treasury. I don't give any credence to that line of 

thinking, but for those who now fretting about this scenario, my 

proposals here will offer a superior solution in a decentralized 

system.) 

A Personal Pension. So, here's a federalist "public option" for the 

Treasury to consider — a way for state pension funds or state 

treasurers to rise to the occasion and offer a better mousetrap for the 

citizens of their respective states. I use the term "public option" 

advisedly, knowing that it was a nail in the coffin of the recently 

stalled health-care reform initiative, and suggesting that a 

decentralized approach should satisfy states-rights advocates who 

oppose central government monopolies. 

Treasury could first allow any state treasurer or statewide pension 

system to exchange a citizen's 401(k), 401(a), 403(b), 457 or IRA 

securities portfolio for a taxable retirement pension. States would 

have to adopt qualifying statutes to authorize these arrangements. 

Federal tax codes would require revision to permit these exchanges. 

Federal regulations and state laws would have to include some important 

safeguards, such as: 

• The underwriting fund must be overseen by independent trustees with 

strict fiduciary requirements, and protected by law from appropriation 

by the state or anybody else. Assets must be held for the exclusive 

benefit of participating citizens. 

• The actuarial life-expectancy tables used to underwrite the pensions 

must be conservative to assure that increasing longevity does not leave 

a deficit for our grandchildren to bail out later. 

• Investment return assumptions should be no greater than 85 percent of 

what pension funds normally assume for long-lived assets. Right now 

that would be 85 percent of 8 percent — or about 6.8 percent. That 

would prevent state legislatures, treasurers or pension officials from 

getting too aggressive in their investment practices, as these are 

retirees and not young employees. A 6.8 percent return would comport 

with a conservative-growth asset allocation of 40 percent or less in 

stocks and the rest in bonds. (This is much more conservative than the 

typical pension fund, which invests with 60 percent to 65 percent in 

equities — because incoming participants are still in their 20s and 

30s, which allows the funds to take very long-term investment risks.) 

• No more than $90,000 of annual pension income can be purchased by any 

individual, to prevent excessive use by wealthier investors who are 

well able to find other options for their money and who can afford the 

market risks that others cannot. 
• The funds must establish a reserve for future market losses which 

takes into account the worst market experiences of the past 80 years 

(the 1930s, 1973-74 and the 2008-09 bear markets). Any investment 

surplus beyond such market-stabilization reserves should be credited 

equitably over the projected lifetimes of participants as a revocable 

cost of living allowance (COLA). That way, a future market loss would 

trigger discontinuation of the COLA. 

• Any cost-of-living feature must be capped to prevent runaway costs. 

Appropriate reserves and portfolio hedge policies must be required. 

COLAs must be reversible and revocable if market values erode reserves. 

• The exchanges must be optional and voluntary. No Argentine-style 

commandeering of 401(k) and IRA accounts to bail out state governments. 

All exchange documents would carry trust law protections as well as 

contractual rights protected by state and federal constitutions. This 

Federalist structure would assure the checks-and-balances our 

forefathers envisioned, in protection of individual rights. 

For this to work, the Treasury and DOL must allow tax-qualified defined 

contribution and IRA plans to hold a "personal pension" issued by a 

state agency as a qualified asset. The funds transferred from the 

individual's accounts would be exempt from withholding taxes during the 

exchange, just like an IRA rollover, and then taxed during 

distributions. 

A tax-exempt "Roth" pension. Here's another twist that could be 

considered as well. The same state agencies that offer these personal 

pensions could also offer a tax-exempt income stream at a lower 

interest rate. For example, Congress could allow the state or its 

pension fund to pay a tax-exempt interest rate of no more than the 

yield on long-term U.S. government bonds, plus the annuitization of 

principal over the investor's life expectancy. For those seeking 

inflation protection, the personal pensions could also be structured to 

provide a lower initial rate and a cost-of-living feature, using the 

Treasury TIPS interest rate to set the earnings-rate limits. 

By making these pension payments tax-exempt, the Congress would forgo 

revenue for the amount of the retiree's tax savings versus a taxable 

pension as described in the prior section. For low-income participants, 

that won't amount to much, but for those in higher income tax brackets, 

it could be viewed as a giveaway. Hence it may be appropriate to 

require that income taxes be paid on some of the tax-deferred account's 

value at the time of conversion, similar to a Roth IRA conversion. 

Something like a 5-year income averaging formula would make sense here. 

Likewise, these tax-free pension exchanges should be disallowed for 

wealthy investors who own a million or more of tax-free municipal bonds 

or other tax-preference items like oil depletion — they already have 

enough tax incentives and retirement security. Middle-class retirees 

might find the tax-free income a worthwhile benefit, however, 

especially if it's inflation-protected. 

For the states, a tax-exempt payout rate would significantly reduce the 

level of portfolio risk required, and thus enhance the odds of success. 
Creative federalism. Ideally, each state would sponsor its own personal 

pension plan, much as the popular "529" college savings plans have 

sprouted across the country. Federal regulations should allow residents 

of any state that does not offer such an option may participate in 

another state's programs, which would create a competitive non-profit 

market for these exchanges. This would assure that all Americans have 

an opportunity to obtain a competitively underwritten lifetime pension 

with their personal nest eggs, without resorting to a national monopoly 

controlled by Congress. 

Of course it is conceivable that one of the states or its pension funds 

could mess up this idea and blunder its way into a financial deficiency 

through stupid investments or actuarial miscalculations. But how many 

individual investors are already doing that on their own in the current 

system? I'd rather bet on the long-term judgment of prudent fiduciaries 

than millions of naïve individual investors who have no clue about how 

to invest their 401k and IRA accounts now, with a real risk of 

outliving their money. 

Political notes: Who wins, who loses? As noted above, the mutual fund, 

banking and defined contribution industry will oppose this approach to 

retirement security because it would reduce their markets and their 

profits. Conversely, pension investment managers would gain assets and 

thus grow their businesses. Actuaries would enjoy a new business line. 

State and local government officials and their pension plan 

administrators might be ambivalent about this idea because for some it 

will just be extra work. But let's not forget that when people outlive 

their life savings, they often become wards of the state. With lifetime 

income protection, there would be a long-term savings in states' 

welfare costs — which ought to be ample incentive for the states to 

actively support this idea. Further, this facility would align the 

interests of public pension funds and their participants with the 

general taxpayers, who would become close cousins of public pensioners 

through their personal pension obtained through the state. This 

alignment of interests could reduce the level of pension envy that 

continues to build, because individual citizens could purchase the same 

kind of lifetime income protection that public pensioners receive. (Of 

course, the average 401(k) participant's $80,000 account balance will 

only buy her a $7,800 annual pension vs the average public retirees' 

far more generous full-career benefits, but it would be a step in the 

right direction.)