I would lean toward retention because of the delay in their development, as well as the fact that they are lagging in reading skill as well.
I saw your other post on vision therapy. I would see that both kids went through vision therapy if they need it and then find someone to make sure that they have the proper reading skills in place. But do the vision side first, as this is the key to getting it all done efficiently.
It's quite possible then that what you want to happen (seeing both kids make good gains the second time around) will happen, because their vision skills will be in place, they will understand how reading works, they will be more mature and, hopefully, will get more out of second grade.
Retention is a bad idea when no plans are made to change the experience. Vision therapy can be the difference.
I work extensively with kids who've gone through vision therapy (I teach a phonics curriculum in private practice) and most of the kids are easy to work with once their vision skills are in place. However, some also need the skills I teach to be explicitly taught to them as well.
I've got a website, OnTrack Reading
, where you can get some added insight into vision therapy, as I'm a strong advocate and have written a lot about it on the site. There's also a lot of information on the phonics curriculum that I use which you might find useful. But do pursue the vision therapy.
Rod Everson