Democratic gains ripple into fund industry

By Jason Szep - Analysis

BOSTON (Reuters) - As Democrats celebrate winning the White House and gains in Congress, the victory is rippling through the $11 trillion mutual fund industry in anticipation of reforms to retirement plans that could hurt earnings.

Some academics say the financial crisis raises questions about the vulnerability of a retirement system managed heavily by fund companies where many workers rely on 401(k)s and similar plans with deep exposure to volatile stock markets.

U.S. workers lost more than $2 trillion in retirement savings in the last 15 months, a loss that could lead workers to delay retirement, Peter Orszag, the director of the Congressional Budget Office, told Congress last month.

"As an outgrowth of this downturn, will we see new attempts to change 401(k)s in any way?" said Geoff Bobroff, head of fund consulting firm Bobroff Consulting Inc in East Greenwich, Rhode Island, reciting a question the mutual fund industry is asking after Tuesday's historic presidential election.

"Will Congress decide to weigh in and revise the 401(k) process plan? To some extent it would be helpful because it could enhance or encourage more savings. On the other hand more regulation could just be more burdensome," he said.

The fortunes of the U.S. mutual fund industry are tied increasingly to retirement savings and to plans such as 401(k)s that allow workers to defer taxes on some income and typically put the money in a mix of stock, bonds and other investments.

About half of the $4.3 trillion invested in these so-called defined contribution plans is managed by mutual fund companies, according to data from the Investment Company Institute, the trade group for the U.S. mutual fund industry. Fees from those assets flow directly to fund companies' earnings.

Congressional Democrats have already expressed concern about the vulnerability of America's retirement system following decades in which employers have increasingly abandoned traditional pensions and forced workers to rely on tax-advantaged 401(k)s and similar plans with market exposure.

Rep. George Miller, a Democrat from California and chairman of the House of Representatives' Education and Labor Committee, has called 401(k)s, "a big failure in terms of providing an adequate retirement for middle-class Americans."

RADICAL ALTERNATIVE

Teresa Ghilarducci, an economist at the New School for Social Research in New York, floated a radical alternative to 401(k)s at a hearing held by Miller on October 7.

Under her plan, workers would receive a annual $600 tax refund if they set aside 5 percent of their pay into a retirement account run by the Social Security Administration, which would then invest globally in risky assets to seek high returns. From that pool, workers would be paid a guaranteed 3 percent a year indexed to inflation.

The change would encourage workers not to hang on to jobs longer than planned. Because their returns would be guaranteed, workers would be able to retire on schedule, she said.

"We need people to retire when the economy tanks in order to keep up aggregate demand and to reduce pressure on the labor market. And the only way to do that is to unhook the finance markets from retirement income," she told Reuters.

But she doubts Miller will adopt her blueprint in full.