MIAMI -- Nearly two years after the collapse of Bear Stearns tipped off a global financial crisis, many people are still frustrated, confused, afraid, angry or resentful. Investors, regulators, legislators and Wall Street executives occasionally look for someone to lash out at, but no one is sure whom to blame or how to prevent such a disaster from happening again.
There are a number of proposals being debated in Congress to increase transparency and help regulators assess risks, but even though Congress has been deadlocked for months and unable to do much of anything, executives are almost certain there will be action on target-date funds.
"In political circles, there is often an ingrained tendency to overreact," said Paul Schott Stevens, president and CEO of the Investment Company Institute, speaking at the National Investment Company Service Association's annual conference at the Doral Golf Resort & Spa.
With the financial crisis still fresh in Congress's constituents' minds and with election season only months away, retirement products including 401(k)s, Individual Retirement Accounts and target-date funds have clearly caught Washington's attention, Stevens said.
"Both the Labor Department and the Securities and Exchange Commission are examining regulation of target-date funds, and the Senate Aging Committee has raised questions about them," he said.
"Much of the controversy about these funds has been generated by certain pension consultants who have their own business interests in the debate," Stevens said. "Target-date funds are a highly efficient mechanism for allocating assets and tailoring investment risks over time. That is not lost on these consultants, who would prefer that 401(k) plans pay them for that service."
The already highly regulated and transparent mutual fund industry has been lobbying Washington to not add burdensome regulatory changes just for the sake of change, and has continued to push for expanded disclosures instead of new rules.
"We've given our principles to the Labor Department and the SEC, and we hope they'll use a similar approach should they decide to develop new disclosure rules," Stevens said. "The same disclosure should apply to all target-date strategies, whether they are offered as mutual funds, collective trusts, insurance company separate accounts, or customized products from pension consultants."
Stevens said the ICI also supports efforts to expand access to retirement savings, whether through simpler plans for small employers or through payroll IRAs.
"President Obama has proposed requiring firms with 10 or more workers to offer payroll-deduction IRAs, with automatic enrollment," he said. "We are studying that idea with an eye toward the key characteristics of 401(k)s. An auto IRA should not foster the creation of a large government bureaucracy-because the private sector can meet the needs of these savers-nor should it be burdened with highly prescriptive regulation of providers and products."
Stevens said it is vital that any new savings plan does not undermine the current employment-based retirement system by discouraging employers from offering 401(k) or pension plans.
Wall Street Tax
Stevens said a major concern for the ICI this year will be lobbying against a proposed 0.25% tax on stock transactions and 0.20% tax on futures contracts, swaps, credit default swaps and options.
While both the House and Senate versions of the tax bill specifically exempt mutual fund share transactions, Stevens said it will be extremely difficult to sort this out, as mutual funds purchase the stocks and other securities that would be taxed. Stevens said the proposals make the operating complexities of cost-basis reporting pale in comparison.
"No matter how you orchestrate this tax, the likelihood is that average investors are going to pay it," he said. "Any way we look at this, it will hit the little guy hardest. Big investors will find a way around it, firms will pass the costs on to investors and it will end up benefitting big Wall Street firms the most."
"There is a tendency to pile on regulations that make it harder for the end user, because we're not looking at it from their point of view," said Thomas Rowley, executive director of Van Kampen Investments. "There is always lag time when legislating for the next generation. It's like trying to legislate a moving target."
"Legislators are always trying to fix the crisis of the moment," said Kathryn Capage, senior director of retirement research at Invesco Aim Distributors.
If the key to the retirement problem is that Americans aren't saving enough or starting to save early enough, it would seem logical to create educational programs that target young people and get them to become investors, she said.
"Unfortunately, there is a wall of Baby Boomers coming into retirement without any savings," she said, and "18-year-olds don't vote."
Regulation by Enforcement?
Despite the well-intentioned efforts to improve disclosure, the ever-increasing complexity of financial products makes it nearly impossible for the lay person to comprehend them.
"We've been trying to educate the adviser community on what to tell participants, but by the time it reaches investors, it becomes 'Don't worry, we'll figure it out,'" Rowley said.
Many industry leaders are worried that the SEC's new enforcement division, led by former federal prosecutor and Wall Street executive Robert Khuzami, is launching a massive "shock-and-awe" campaign to round up violators large and small that will only cause confusion and increase compliance costs.Robert Nisi, director of financial services advice at PricewaterhouseCoopers,said, "It will be regulation by enforcement."
"All these extra layers are not helping investors; they are just adding more costs," said Steven Miyao, CEO of kasina. "The industry won't eat these costs, but will instead push them on to investors."
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