"THE SEC TODAY: AN ACCENT ON INDIVIDUAL INVESTORS" REMARKS BY CHAIRMAN ARTHUR LEVITT U.S. SECURITIES & EXCHANGE COMMISSION PUBLIC PENSION INVESTMENT POLICY CONFERENCE NEW YORK, NY -- MARCH 20, 1996 You all know that my father served for 24 years as New York State Comptroller. From my youngest days, he impressed upon me the duty to care for the assets of other people prudently. He considered it a sacred trust. The depth of his commitment can be gauged by recalling the events of the New York City fiscal crisis. As sole trustee of 2 of the 3 State-run pension systems, my father withstood enormous pressure to make a blanket commitment to buy substantial sums of New York City or MAC obligations. He declined to do so -- and received heated criticism as a result - - because he believed that a fiduciary must hold the interests of trust beneficiaries paramount -- that those interests are not just "important," nor even merely "crucial," but paramount. Instead of referring to "state pension funds," he preferred to call them "state-run pension funds." He knew that the real owner was not the state but the nearly 750,000 present or former government employees who had a stake in the funds. He firmly believed their interests were supreme. You can understand why I have such respect for money managers. I regard your role as one of the most important to the average American, who often knows little of its intricacies beyond an implicit faith that their savings will be there in the future when they need it. But in recent years, with the rise of the defined contribution retirement plan, Americans planning for retirement need much more than faith -- they need education, and that's what I'd like to talk with you about today. My predecessor William O. Douglas referred to the SEC as "the investor's advocate" -- that's been our role from the start, and this Commission has placed a special accent on investor protection. This doesn't mean that we de-emphasize the concerns of institutional investors; it simply means that we see the individuals behind the institutions. The "rise of the institutional investor" has become an axiom of market history. On the face of it, it is true -- in 1950, individuals and non-profits held the vast majority of American corporate equities, some 91 percent, as compared with 6 percent for institutions; today, institutions and individuals rival each other, holding upwards of 45 percent each. But to the Commission, whatever else institutional investors may represent, they stand for the millions upon millions of people who own shares in mutual funds, or whose retirement money is invested in our capital markets. We are obliged to work in their interest no matter how they happen to have come to our markets. That is why we've been working to highlight the looming gap between retirement needs and retirement savings. Before I discuss the specifics of what the SEC is doing, let's review the numbers. They're startling. Within a decade, 76 million baby boomers will begin retiring, raising the percentage of retirees in the population dramatically. Increasing life expectancy and declining birth rate will cause the ratio of retirees to workers to soar. Social Security is no longer taken for granted -- just last year, fully one-third of respondents to a Money magazine poll believe the system won't be able to send them checks regularly when they retire. There's growing recognition that, even assuming that Social Security benefits will continue, they need to be supplemented by individual retirement savings. At the same time, as you know, the nature of the retirement plan market is changing. Defined contribution is displacing defined benefit as the pension plan of choice, particularly among small employers. More than 25 million Americans now have 401(k)s, which today boast some 648 billion dollars in assets. Add in 403(b) plans, and those assets exceed 900 billion dollars. Under the traditional pension plan, the risk of poor performance fell on the sponsoring employer. Under a defined contribution plan, the risk falls on participants. The investor has left the passenger's seat for the driver's seat -- and, at first glance, this is a positive change, giving individuals greater control over, and responsibilty for, their own destiny. There's only one problem -- many of these new people behind the wheel never learned how to drive. In the first place, Americans can hardly be called active savers -- we save 4 to 5 percent of after-tax income; the French and Germans save 12 percent; the Japanese, 15. Private savings per American worker are estimated to be only about one-third to one-half of what will be needed for retirement. At the same time, no matter how much they may save, too many Americans simply have no idea how to invest. Not long ago I read an article about a survey of participants in pension plans. More than half didn't know that stocks consistently produce higher returns over the long term than guaranteed fixed-income investments. Many of those responding had no retirement money invested in stocks. Fully one-third of those surveyed believed there was no risk in investing in bonds, and 14 percent believed there was no investment risk in balanced mutual funds. Perhaps most disturbing, the majority of employees had unrealistic expectations that their investments, combined with Social Security, would provide them with a comfortable retirement income. Little wonder, then, that so many are sounding the alarm about American retirement savings. Not everyone is predicting a crisis. Business Week, for example, believes that the golden years of baby boomers will be saved by a combination of increasing productivity, and a pattern of higher savings as people enter their 40s and 50s. While I'm happy to share their optimism about productivity, I'm hesitant to see it as a white knight that will save us. The most prudent course is to foster higher savings and wiser investment -- and one of the best ways to do that is through education. It is imperative that plan participants -- hard-working Americans struggling to build a secure future for their families -- have the information they need to make prudent investment decisions. Without proper guidance, employees tend not to set aside enough money -- indeed, the median amount in 401(k) accounts is at best only about $16,000; or they may invest their plan assets too conservatively; or they may play the market poorly, coming in when it's high and jumping out when it's low; or, those working for profit-making companies may concentrate their holdings too heavily in the employer's stock, increasing risk and limiting gains. We've got to educate employees to participate sooner, save more, and invest wisely. Recent trends in the investment management industry and in the media indicate that investors are hungry for financial information and guidance. The last several years have seen a marked increase in the amount of assets invested in vehicles that make allocation decisions for investors, such as wrap accounts, asset allocation funds, and mutual funds that invest in other funds. Financial planners, paid for the advice they provide and not for the sales they make, are capturing an increasing share of the financial planning market. Many newspapers have recently expanded their business sections. The New York Times now devotes a large portion of its Sunday business section to personal finance articles. There are more magazines, television, and radio shows devoted to personal finance than ever before, and their audiences are growing. In short, the market is responding to the demands of individual investors for more financial information and guidance. I can personally attest that investors want and need help in understanding the myriad investment opportunities available to them. Over the past year, I've held a series of investor town meetings across America. These meetings not only give me an opportunity to advise people about the questions they should ask before they invest, they also provide a forum for hearing what investors want or need. I'm amazed at the level of interest out there -- at gatherings in Texas last year, more than 1,500 investors showed up. And one of the things they want most is guidance in selecting appropriate investments while avoiding the pitfalls. We must respond to this need -- and by "we" I mean plan sponsors, plan fiduciaries, administrators, investment advisors, and fund managers, as well as the SEC. Investor education may be costly, but the cost of doing nothing will be far higher -- to us; to employees; and to our nation. The trend toward defined contribution plans, and the increase generally in pension plan assets, has had a deep influence on the agenda and priorities of the SEC. The Commission does not regulate pension plans, but we do regulate mutual funds, in which many plans invest. The statistics tell an extraordinary tale. Approximately 31 percent of all mutual fund assets now consist of retirement money -- and that proportion is growing daily. Moreover, in 1993, almost half of all money taken in by mutual funds was retirement money. Let me tell you about some of the ways the SEC is responding to this trend: We're working to improve disclosure to defined contribution plan participants. Under current law, individuals purchasing mutual funds through pension plans may receive far less information about the funds than they would if they purchased through a broker or directly from the fund. Last year, the staff took an interpretive position that should encourage mutual funds to provide useful summary information to prospective plan participants. Another interpretive position, issued just a few months ago, facilitates an employer's ability to provide information about investing in its defined contribution plan. Employers can now help their people plan for retirement without concern that these educational activities will unwittingly subject them to regulation ny the Commission as investment advisers. And we are continuing to develop the "profile" prospectus, which features a short-form summary of key information for comparison. The SEC is also encouraging funds to write prospectuses in plain English. The more simply and economically you explain investment products, the better equipped plan participants will be to make decisions about their retirement. This is particularly true for plan sponsors that offer complex investment products. We're developing a program designed specifically to assist prospectus writers. We hope to hold the first workshop, which is being developed with the assistance of an English professor and author of a book on writing clearly, later this year. Another goal of this initiative is to provide investors with better tools for understanding a mutual fund's risk level. Last year, for the first time ever, we issued a public request for comments on ways to improve risk disclosure in fund prospectuses. We received thousands of comments in response, the vast majority from individual investors -- additional testimony to their hunger for information and guidance. The Commission has also expanded the mission of its Office of Investor Education and Assistance to include developing educational programs that will enable investors to better protect themselves and make wiser investment decisions. We've produced a series of pamphlets, handbooks, and brochures designed to teach people about the different types of investments, and how to invest their money wisely. We've instituted a toll-free 800 number that allows investors to place orders for our educational materials and also provides answers to the most common questions we receive. We've even established an SEC site on the World Wide Web that offers information and educational materials, as well as our huge EDGAR database of corporate information, for the benefit of investors. During the coming year, we hope to do even more in the way of education. We'll prepare an Investor Information Kit containing our educational brochures and pamphlets as well as other materials, such as a video on investor rights and remedies, and worksheets that will help investors determine whether they are saving enough for their retirement. We'll continue to work with personnel offices, unions, and the Department of Labor to educate employees at the point where they need to make a decision about retirement savings. We'll also be developing a curriculum on personal finance for high school and adult classes to bring our message to the people who need it most. It's clear that one of the key challenges of the next decade will be to educate a generation of investors who, unlike their predecessors, will be solely responsible for ensuring that they have enough money for retirement. This is not something we can achieve alone. The Commission is always seeking to improve its efforts at investor education, and would like to tap your knowledge and experience. We'd like to work with you to improve the quality of the materials available to investors. Our efforts to educate must reach investors -- but they must also reach the recipients of the roughly 10 million lump sum distributions made each year. Jobs may end; but whether one is changing jobs or retiring, the need to invest wisely never ends. Shouldn't lump sum distributions come with information on how to invest wisely, avoid fraud, and get help? We'd like to work with you to make that happen. Our efforts must also reach the 40 percent of those eligible for a retirement plan, but not taking advantage of it. We must work together to motivate those employees, who are often at the bottom of the income scale. It's not enough to target marketing efforts at professionals, who are already likely to know something about finance and economics. We've also got to reach the cafeteria workers and custodians, the secretaries and support staff -- in short, all the members of your plans -- the people who have entrusted to you a measure of their future security. Educating investors is not a sacrifice of time and resources in behalf of the American worker. Educating investors is in your own interest. In the last decade, almost two-thirds of the asset growth of the money management industry has occurred in products where the household is the direct decisionmaker. No wonder Peter Drucker calls retirement savings one of four great markets of the future. Investment management today is a very competitive field -- and increasingly, the place where companies are going head-to-head with competitors is in the quality of the educational services they provide to plan sponsors. Companies are taking a cue from Madison Avenue and using high- powered marketing techniques to reach participants or potential participants. Outside communications consultants are being called in to help. Sophisticated advertising techniques, such as market segmentation studies and targeted audiences, are becoming the norm. Retirement planning workbooks and software are being made available, offering various strategies for employees to meet their funding goals. Companies are establishing Internet sites, to better serve and communicate with participants. Indeed, there's no lack of good ideas about ways to impress upon employees the need to invest well today. Some are easy -- posting returns on the various investment options, for example, for all employees to see. If you've educated your participants well, they'll know not to switch investments back and forth chasing the last quarter's returns -- they'll take the long view. Other ideas would perhaps be more difficult to implement, but they may also be more effective. Former SEC Commissioner Carter Beese, for example, suggested that participants' statements compare their current retirement account balance to the amount employees should have in order to retire with 60 to 70 percent of their retirement age salary -- that's a figure few people could easily ignore. Those are just a few of the intriguing ideas on the market today. As diverse as they are, they have a common goal in education -- education that draws eligible people into a program; education that increases their sophistication once there; and education that encourages them to save enough for a comfortable retirement. Educating investors is a responsibility not just for the SEC, but for all of us -- including the media as well. We must help prepare investors today for a secure tomorrow. That's a goal we share -- and if we work together, it's a goal we can achieve and we will achieve. Thank you. # # #