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ElCid16 (98.07)

Government to fund federal debt through 401K/IRA accounts?

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January 27, 2010 – Comments (9)

"Bloomberg reported Friday that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity."

http://community2.myfoxdfw.com/_OBAMA-DEMOCRATS-LOOK-AT-TAKEOVER-OF-401K-IRA-ACCOUNTS-TO-FINANCE-GOVERNMENT/BLOG/1716156/78592.html

Basically the goverment is going to require 401K and IRA contributors to allocate a portion of their contributions to investments backed by govermnet bonds.

Keith Fitz-Gerald describes it a bit more here:

http://moneymorning.com/2010/01/27/retirement-plans/

When I first read this, it really set me off.  However, I'm going to try to look at the positive aspects that will come from this - if it actually comes to pass.  Many successful investors such as David Swensen preach about asset allocation being the best [statistically-backed] strategy for successful long-term portfolio gains.  And thats basically what 401k plans and IRAs are...long-term investments.  What percentage of 401K and IRA investors don't have a clue as to how to invest, and simply put their money with the most popular mutual funds?  By mandating the purchase of goverment annuities, investors will develop better asset allocation by default [even though goverments backed bonds will get battered with rampant interest rate increases].  Furthermore, is there a chance that this will help suppress tax increases over the long haul?

I fairly ignorant of the subject, in general, therefore I'd appreciate a discussion that's a little more in depth than "OMG THE GOVERMENT SUCKS AND OBAMA SUCKS!"

Thanks.

9 Comments – Post Your Own

#1) On January 27, 2010 at 1:45 PM, ChannelDunlap (< 20) wrote:

Seems silly.  doesn't the gov't already choose where to allocate the money I pay towards Social Security?  Why not just beef up that system rather than mess around with the current 401k/IRA system?  I would have no problem if they revamped social security to require a little more but pay out a little more.  If they're trying to establish some kind of realistic and reliable retirement package for people, that would seem to be the way to do it.  Aside from the whole "Social Security is bankrupt!" argument.

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#2) On January 27, 2010 at 2:05 PM, Turfscape (40.96) wrote:

I won't comment on the chances of this coming to pass, but it looks to be a half-step towards the elimination of Social Security and full "privatization" of retirement in the U.S. rather than a bailout of U.S. debt.

The right-wing nutcase sources linked in your post would be the exact opposite if the plan were hatched from Republican minds (and it may very well have).

There is a push to eliminate Social Security and let people own their retirement outright, but as a country, as a society, we are financially uneducated to the point that that is dangerous. It is FAR too easy to dupe people into risky investments with money that is too vital to daily life (just look at the freakin' mortgage situation!).

So, how do we privatize retirement funds without risking having a good portion of our nation's seniors left with only pennies because they were 100% invested in Frozen Concentrated Orange Juice futures at a time when no one wants OJ?

Easy enough...modify the qualifications for retirement accounts. You'll have to have at least a portion of your personal retirement accounts in secure (albeit low return) government-backed securities.

Regardless of what you think of the U.S. government and our debt load, the fact remains that government-backed securities are still considered the least risky vehicle for savings/investment.

I'll see where this is going before calling doomsday and conspiracy and outrage now!

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#3) On January 27, 2010 at 2:06 PM, Jbay76 (< 20) wrote:

By mandating how we invest our own money for our own future, the government takes away our freedom to decide how we wish to prepare for our future.  They need to think of a different way to fund their shopping sprees. Annuities suck anyways.  If this does pass,  I'll just stop contributing to my IRA and just use a standard investment account.  At least that way my money goes to stocks/ETFs/mutual funds as I choose them when I choose them.

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#4) On January 27, 2010 at 2:21 PM, BMFPitt (79.30) wrote:

This urban legend is at least 2 years old now, and has gotten pretty annoying.  It's generally accompanied by "OMG THE GOVERMENT SUCKS AND OBAMA SUCKS!" and a request that you forward the information to all your friends.

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#5) On January 27, 2010 at 2:45 PM, ElCid16 (98.07) wrote:

One of the reasons the Obama administration may be able to get it passed now, versus two years ago, is due to the fact that many 401K plans lost so much money over the past two years.  There could very well be a claim that the market is just too volatile, and that retirement accounts need to hold more secure income-based investments.

http://www.bloomberg.com/apps/news?pid=20603037&sid=aHFCE999fWR0

Another reason as to why it may be different this time around is the level of federal debt that we're approaching.  China and Japan may no longer be "dependable buyers" of governement debt and the Fed may stop buying bond as well. 

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#6) On January 27, 2010 at 11:30 PM, devoish (99.07) wrote:

Where is the Gov't mandating you buy treasuries? Neither article supplies any evidence that it is. In the first one it says: 

CNBC's Rick Santelli broadcast the rumor the same day from the trading floor during CNBC's "Power Lunch" show

Perhaps a visit to Dept of Labor's website will qualify as investigative journalism, Mr Santelli, as opposed to Rumourizing.

At Dept of Labor we learn that nobody is making you buy any treasurys, just that maybe an investment advisor should be required to mention them.

Poor Rick Santelli, imagine an investment advisor telling one of Ricky's sucker's that at age 75 maybe they don't want to be trading in the market against GS with Ricky in the bakground and might be better off with some of their money in treasurys. Or imagine the horror of a Gov't website advising US treasurys, instead of a GS investment advisor telling you to buy CMBS from GS, who was selling them because they determined they were worthless.

In light of the FACT that GS was selling CMBS at the same time they were advising pensions to buy them, maybe, just maybe, the Gov't might be more trustworthy.

I will not take advice from GS. I cannot imagine why anyone does.

Yeah, I'm afraid of the Gov't.

Comments Received

    A number of the commenters expressed the view that the final rule
raises significant issues of law and policy, and should be withdrawn.
Several of these commenters argued that the class exemption contained
in the final rule permits financial interests that would cause a
fiduciary adviser, and individuals providing investment advice on
behalf of a fiduciary adviser, to have conflicts of interest, but does
not contain conditions that would adequately mitigate such conflicts.
They asserted that investment advice provided under the class exemption
therefore might be tainted by the fiduciary adviser's conflicts. Other
commenters expressed concerns about those provisions of the rule
relating to the ``fee-leveling'' requirement under the statutory
exemption. In particular, some opined that the Department's
interpretation of the statutory exemption's fee-leveling requirement is
incorrect for permitting the receipt of varying fees by an affiliate of
a fiduciary adviser. As a result, they argued, a fiduciary adviser
under such a fee-leveling arrangement has a conflict of interest, and
the final rule does not adequately protect against investment advice
that is influenced by the financial interests of the fiduciary
adviser's affiliates.
Commenters who advocated retention of the final
rule argued that it contains strong safeguards that would protect the
interests of plan participants and beneficiaries.

http://www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=23318&AgencyId=8&DocumentType=2 

The rule change was dropped, after comments, that were much more intelligent than the news articles.

If you think you are talking about something else, please provide me with a link, to the official Gov't press release you are talking about.

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#7) On January 28, 2010 at 8:09 PM, ElCid16 (98.07) wrote:

Devoish,

The DOL sight you linked was the withdrawl of the investment advice regulation, with was withdrawn on Nov. 17th. 

"For the reasons set forth above, the publication on January 21, 2009 (74 FR 3822), of the final rule amending 29 CFR Part 2550, for which the effective and applicability date was delayed on March 20, 2009 (74 FR 11847), May 22, 2009 (74 FR 23951) and November 17, 2009, is withdrawn."


During her Dec. 9 live chat, Borzi addressed the withdrawl, and spoke about going back to the drawing board to re-address retirement account issues. 

"EBSA withdrew the investment advice regulation in order to afford an opportunity to take a fresh look."

http://www.dol.gov/regulations/chat-ebsa-static.htm

She later goes on to say:

"The departments (Department of Labor and Department of Treasury) are publishing a joint request for information as a first step in exploring impediments, whether statutory, interpretive or regulatory, to the offering of lifetime income products by plan sponsors and to the selection of such products by workers. It is premature to announce whether we will be publishing a safe harbor for in-plan annuities. Our objective is to start a dialogue among the stakeholders about this important issue and ultimately to ensure that all workers have the opportunities to consider securing their retirement through an annuity or other lifetime income product."

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#8) On January 29, 2010 at 8:49 AM, devoish (99.07) wrote:

It is hard not to like Miss Borzi having an online chat in order to allow public input into proposed regulations during th e earliest formative stage of the process.

I especially liked this part of the discussion in light of fee structures eating away at the gains of many 401k's.

11:03 Comment From Christopher from Fidelity: re participant disclosure regulations the top priority? And will we see an update to the DOL's electronic media regulations in 2010?

11:03 Phyllis Borzi: Christopher, yes, we are working very hard to complete our work on both the fiduciary-level and participant-level fee disclosure regulation. With regard to electronic disclosure, we are continuing to review a variety of issues in this area.

I am not so sure either article you referenced portrays the information from the web chat with even a modest degree of accuracy. To intrepret Miss Borzi's comment Our objective is to start a dialogue among the stakeholders about this important issue and ultimately to ensure that all workers have the opportunities to consider securing their retirement through an annuity or other lifetime income product." as FOX reported as "The Obama administration appears to have come up with a novel way of financing trillion-dollar budget deficits – demanding IRA and 401(k) holders buy trillions of dollars in Treasury bonds. sounds to me like I am going to hear more FOX stories on the intellectual level of "death panels".

Once again, I am sorry I took a story reported by FOX news seriously.

 

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#9) On January 29, 2010 at 8:50 AM, devoish (99.07) wrote:

dkilgouri16,

Thank you for supply the link to your source, it saved me a lot of time.

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