Harvard professor wants more rules to protect aging retirees

About half of people in their 80s are unfit to make important financial decisions, and more regulations are needed to protect these older investors, a Harvard University professor told a group of securities commissioners in Baltimore on Sunday.

"A generation ago, everyone had a [pension] and you didn't need to be sophisticated. The check just came every month," said David Laibson, a behavioral economist at Harvard.

Now that retirees are expected to manage huge IRAs on their own, "we have to create an environment that is far more protective for these individuals," he said.

Laibson spoke at the annual conference of the North American Securities Administrators Association at the Baltimore Marriott Waterfront. The three-day meeting of state securities commissioners focuses on the new financial reforms and the impact on investors, regulators and the securities industry.

The Harvard professor was named by Wired magazine in fall 2008 as one of the 15 smart people that the next president should listen to. Those listening to him on Sunday heard some grim facts.

We're at our best making routine financial decisions in our 50s, Laibson said. Thereafter, our skills slide.

At age 60 to 64, less than 1 percent of North Americans suffer from dementia, he said. Every five years thereafter, the number doubles so that by age 85 and older, 30 percent have dementia. In addition, about 29 percent of those in their 80s have many of the early symptoms of the disease, he said.

Growing cognitive impairment can lead to elder abuse, he said. An Investor Protection Trust study, for example, found that 20 percent of Americans age 65 and up reported they have been taken advantage of financially. The actual figure is likely higher, Laibson said.

Employers have a fiduciary duty to offer diverse investments with reasonable fees within their 401(k). But once workers retire and roll that money into an individual retirement account, they lose those safeguards, Laibson said.

His solution is to encourage retirees to keep their money in their employer's plan so they continue to have those protections. Another option, he said, is to extend those fiduciary safeguards to retirees' IRAs.

"It's absurd that people that have the most protections are the people who need it the least," Laibson said. "Those between 25 and 65 have a higher cognitive function than those older than 65."

Additionally, Laibson said, a variety of low-fee financial products should be created that retirees can roll their money into unless they choose to invest elsewhere. It would work similar to the government-sanctioned investment options for workers who are automatically enrolled in a 401(k) at work, he said.


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