WASHINGTON - Underscoring the theme of enhancing shareholder value, Investment Company Institute President Paul Schott Stevens encouraged the money management industry last week to leverage its innovative past and join efforts to enhance mutual fund disclosure and reinvent the defined contribution space for the next generation of retirees.
As he recounted how the mutual fund industry has grown from its modest, "Dutch fund" beginnings in 1774 to a manufacturer of products that today meets nearly every investor's needs and desires, Stevens said it is incumbent upon the industry to embrace and shape future disclosure in a way that similarly serves fund shareholders.
"That is why ICI supports SEC Chairman Christopher Cox in his drive to harness the power of the Internet to better inform fund investors, to provide them with information in ways that they want and use," Stevens said during his remarks at the 48th annual ICI General Membership Meeting, held here.
Less than one year into his tenure, Cox has made the sticky wicket of enhanced disclosure a front-burner issue at the Securities and Exchange Commission. A former Republican Congressman tapped by President Bush to succeed the controversial rule maker William Donaldson, Cox wants not only to do away with the oftentimes complex legalese found in prospectuses and replace it with plain English, but he'd also like that information available on the Internet where investors can compare competing products in an "apples-to-apples" environment.
To make that happen, he wants fund companies to begin filing documents with the SEC using extensible business reporting language, or XBRL, a data-tagging software that would enable those side-by-side comparisons.
An undertaking that has been accomplished with minimal success by his four most recent predecessors at the Commission, there's reason to think Cox might succeed where they failed because he has technology, as well as one of the nation's most powerful Capitol Hill lobbyists, in his corner. The ICI announced earlier this year that it would begin an XBRL initiative to run concurrently with Cox's.
Stevens warned, however, that it would be no easy task.
"Continuing innovation is a challenge," he admitted. "It involves uncertainty and risk. There will always be doubters, who insist that everything worth trying has been tried, and that change is unnecessary.
"[But] where serving the interests of mutual fund investors is concerned, we must never stop swinging for the fences," he said.
Change is equally constant in the retirement arena, he continued. As the nation's next significant batch of retirees confronts challenges like dwindling pension plans and a shaky Social Security system, Stevens said the industry must rise to their aid and help devise a solution.
"We have done it before, with creativity and innovation," he remarked.
Pointing to the 401(k), which was originally a tiny statute meant to resolve a debate over whether executives could defer taxes on their profit-sharing bonuses, Stevens said the money management industry, using the 401(k), "built a vast structure of creative investment options, recordkeeping systems, marketing programs for employers, education programs for workers and information systems to help employers cope with complicated IRS and Labor Department rules."
Stevens offered a few numbers to further bear witness to the impact of the 401(k) statute. For instance, 47 million Americans participate in 401(k) plans today, more than four times as many as 20 years ago. And at the end of 2005, the plans held assets worth more than $2.4 trillion, which is 17 times the total of 20 years ago.
But the 401(k), he added, is just one element of the booming defined contribution space. Today, 53% of workers are offered DC plans, compared to 22% of workers that have access to defined benefit plans, most commonly known as pension plans. The DC plans, which on top of 401(k)s include 403(b) and 457 plans, together hold $3.7 trillion for millions of Americans.
"These are remarkable figures," Stevens said. "And with the pressures on Social Security and the traditional pension system, think about where America would be now without this quarter-century of innovation in the DC system."
Stevens, however, refused to point to struggling old economy companies, which have migrated away from the expensive, guaranteed lifetime benefits of pension plans for their employees to the much more manageable costs of a matching 401(k), as reason for the explosive growth of the DC space. Instead, Stevens cited a fluid economy and a mobile workforce.
"The hard fact is that lifetime employment is increasingly rare," he said, noting that even among workers aged 55 to 64, only about 25% of them have been with their current employer 20 years or longer. "In this new economy, we will need every means at our disposal to help Americans achieve retirement security."
For starters, Stevens said the Social Security system must be strengthened. Also, the current pension system must fulfill the promises it made to millions of American workers and retirees. And perhaps most importantly, the DC arena, which Stevens said is in a "transitional phase," must live up to its expectations. He noted that the current generation of retirees and near-retirees wouldn't reap the full benefit of a defined contribution plan. That will be reserved for today's 30-something workers, who will have an entire career to build a nest egg on the employer-matching setup.
"Workers can save enough through 401(k) plans over a full career to replace a significant portion of their pre-retirement income when they retire," he observed.
Those workers, however, must be empowered with the tools they need to succeed in such a system. Therefore, Stevens called upon executives in the industry to apply their minds to several urgent needs. First, he said, the saving population must be broadened. The best way to accomplish that is to remove the barriers to automatic enrollment. Secondly, savings incentives must be maintained. That means fighting to ensure that the increased contribution limits on IRAs and DC plans that Congress enacted in 2001 are made permanent.
And, finally, people must be empowered to make better investment choices. That, Stevens said, could be achieved if Congress were to alleviate the legal burden many employers carry when they provide employees with access to investment advice. Also, employers must be provided with better default plans for their employees than the ultra-conservative money market funds so many are forced to use.
All three of those measures are top legislative priorities with the ICI. But even as Congress works toward completing those improvements in the days and weeks ahead, he said, challenges remain in the DC space. Too many Americans are not offered any retirement plan option at work, while the savings of those who are covered must be increased. And the savings of retirees must last longer, as well.
So, Stevens called for universal tax deductions for IRAs, which have become entirely too complex since their introduction in the 1980s. He also called for the passage of the Generating Retirement Ownership Through Long-Term Holding Act, or the GROWTH Act, which would defer taxing funds investors on their capital gains so long as those gains are automatically reinvested (see related story, page one).
"Gains would compound, untaxed, until the fund shares are sold, rather than being nicked year after year," Stevens said. "Investors could avoid selling shares just to pay taxes. The GROWTH Act embodies a basic principle: Long-term investors need a long-term tax policy."
And perhaps most of all, Stevens said, in a hint to regulators, room must be made in the markets "for competitive forces and innovation to do their part to solve our retirement problems.
"We know what kind of future we must build," he concluded. "It must be one that provides a new era in retirement security. We have the opportunity - and we have the obligation - to ensure that all Americans can share in that future."
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