P&I round table: full transcript

040207 Roundtable group 2
Round table participants (from left): Daniel Clifton, Ed Ferrigno, Keith Brainard, Damon Silvers, Roderick B. Crane and Kurt Winkelmann.

Pensions & Investments hosted a round table on March 12 in Washington on which is better: defined benefit plans or defined contribution plans. Participating in the round table discussion were Keith Brainard, research director for the National Association of State Retirement Administrators; Daniel Clifton, executive director, American Shareholders Association; Roderick B. Crane, director, institutional client services at TIAA-CREF; Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America; Damon Silvers, associate general counsel, AFL-CIO; and Kurt Winkelmann, managing director of global investment strategies of Goldman Sachs Investment Management. The moderator was Nancy K. Webman, editor of P&I; Washington Bureau Chief Doug Halonen also attended.

Ms. Webman: Thank you all for coming.

We are going to start with the question: Which provides greater income security at retirement: defined benefit plans or defined contribution plans?

Mr. Brainard: I was wondering if that was a trick question. Of course, defined benefit plans provide more security with regard to retirement benefits. That's what they are designed to do, to ensure retirement income through the life of the participant. What good is a retirement plan if you can outlive your assets?

Mr. Clifton: The question is: What is security? We get to a point where we have over 200 companies listed in the S&P 500 right now with more than $1 billion each of unfunded (pension) liabilities. We have about 30 companies right now that are less than 80% funded, and they have more pension obligations than they do cash on the balance sheet. With health-care costs, it is even worse.

So when we get to the definition of what security means, we have to make sure that the worker is going to have some benefit. And it is not as much about how much money is in there. With that said, we believe that defined contribution clearly provides higher retirement money for mid- and short-term workers. And the people who really benefit from a defined benefit plan relative to a defined contribution plan are older workers who work for the same company for 30 years, because that's what the fund is based on.

Mr. Crane: I think it is a trick question. From our point of view, the answer is neither DB nor DC inherently provides a better or more secure retirement than the other.

It really is a function of plan design that gets you to the point of benefit security. Each of them, DB and DC, has different attributes. They work differently. There are different levels of sharing of risk between employer and participants. But a lot of that can be handled and dealt with through plan design. DB plans aren't inherently riskless to participants. But neither are DC plans inherently riskless to employers.

There are ways that each of them can fail if they are improperly designed …

The question is: What plan design works best to provide an adequate and secure retirement? …

By making DB plans maybe a little bit more risk-sharing with participants, and managing risks better for DC plans than we have in the past — going to a model more like a DC pension approach — we can have the best of both worlds. I think we are probably evolving in that direction. Both plan types are starting to take on attributes of the other. The public sector DB world, for example, has had DC characteristics, hybrid approaches for many, many years. These hybrid approaches where there are DC features and sharing of contribution responsibilities all speak to the point that plan design is the key.

Mr. Winkelmann: Can I just say “yes”? I actually agree with Rod's point. I think the nice part about capitalism is that the structure has evolved.

I think the questions we have to ask … as we think about plan design are: How do we get the kind of professionalism in portfolio construction that historically we have had through defined benefit plans? How do we get the benefits of economies of scale that again we have historically had in defined benefit plans? How do we get the access to skill-based strategies that historically again we have had in defined benefit plans, and, finally, how do we get our hands around some of the risk sharing that has again historically happened in defined benefit plans.

I will not argue that those things are impossible in the defined contribution world. I think there are probably examples where they have been possible. What I would argue is that … defined contribution land is probably the place where there is the next level of evolution. The next level of evolution will have to happen.

Mr. Ferrigno: Certainly debating DB vs. DC is counterproductive. Frankly, in the private sector, not only is it counterproductive, but it is kind of yesterday’s conversation.

It is clear where the private sector is going. The key, the first step in your retirement security, is what kind of assets or, in the DB case, what kind of benefit have you accrued. As we point out, there are risks in both systems.

What I like about the DC system is you as the individual can control the risks. In the DB system, you have no control over the risks. The risks are that your employer goes out of business, your employer drops the plan or you lose your job. So those are three things that you can't control.

In the DC side, everything you can control. Again, what the DC system is doing now is looking at what attributes there are in the DB system that can be carried over. As for the income security with the DB system, we are talking about getting an annuitized payout. What we know is when plans do offer a lump-sum payout out of a DB plan, people take the lump sum … That is not necessarily a bad thing.

Mr. Silvers: I think that we have heard a couple different things that are worth reflecting on. We have heard that there are a lot of issues with DC plans, such as the difficulty of obtaining asset allocation and asset management, problems with annuitization and running out of money before you run out of your life, and that what we ought to do is turn DC plans into things that can fix all those problems. Once you do that, you end up with something that looks a lot like a DB plan.

And that raises the question of why is it that we are moving from a system that does all the things we want to do to a system that does none of them. The reason was touched on by a few people in a very delicate way as went around the table, but it is the real issue here that no one ever talks about, which is you can't do a DB plan without spending real money, and you can do a DC plan without spending real money.

That is what it is all about in the private sector. You can build a DC plan that is not really a DC plan. It takes away all the risk and provides a real benefit, but it will cost you real money.

What the real issue is here is that employers simply aren't willing to do that, that they are moving away from systems for providing employee retirement security that actually can do that, which cost between 8% and 10%of payroll — there's just no getting around it — to systems in the private sector which cost between zero and 3% of payroll. And those systems don't provide retirement security.

They don't provide retirement security for all the reasons we were just discussing, because they expose people to risk they can't manage, because of all kinds of risk — investment-related risk and age-related risk — because the fees are too much, because they are not really professionally managed in any meaningful sense.

But the real reason they don't provide retirement security is because there is simply not enough money in them.

The debate that has passed on in the private sector has passed on to a place that fundamentally endangers both our ability to remain a middle-class society and our ability to have a healthy economy in the future, where an increasing number of Americans will be depending on retirement security that is simply not there for their income and to spend money on our economy. That's the future we stare at because of the debate that Ed said is over.

Mr. Ferrigno: I don't think employers put too much money into the DB plans in the entire 1990s.

Mr. Brainard: Part of the reason they didn't is because they weren't allowed to.

Mr. Ferrigno: They didn't have to, either, because the market was driving it for them. We have migrated to the DC system. One thing we will all agree (on) is that employers act rationally, and their employee relations are governed by rational concerns, competition for the labor market, pressure from stockholders, etc. What we are seeing is the defined contribution system is evolving as the preferred system. It is preferred by employees and preferred by employers. We need to —

Mr. Silvers: Stop right there. They act rationally in their self interest.

Mr. Ferrigno: Right, and having a work force is in their self interest.

Mr. Silvers: Taking away a plan that actually provides retirement security.

Mr. Ferrigno: Look at the record of what DB plans have provided. It is not encouraging when you look (at the) aggregate.

Mr. Silvers: Which would you rather be? Let me ask you this: A person with a DB plan that's vested that is bankrupt and has gone to the PBGC, right, or the median family in their 50s with a DC plan? You are 55 years old. You can choose. You can either be the median DC plan holder, that person you were describing, or somebody with a bankrupt DB plan. Which would you rather be?

Mr. Ferrigno: I would rather be in the DC plan for sure.

Mr. Clifton: I can tell you that there are employees that I talk to, union employees in the airline —

Mr. Silvers: How much is the median DC plan for people in their 50s?

Mr. Ferrigno: I will tell you.

Mr. Clifton: I want to get to it. There is an airline pilot at United, if their pension benefits are getting dropped and they are getting (benefits from) the PBGC, they are losing $500,000 to $600,000 of income over their lifetime. They will tell you today —

Mr. Silvers: Daniel picks the least representative person, which is the airline pilot whose income is over the PBGC benefit. None of them will tell you what the median balance is because it is not enough to live off of. If you offered that person the median balance, they would be eating dog food.

Mr. Clifton: If I offered him that deal five years ago, that person would say, “I will take the defined benefit guaranteed income.” That income is gone now. We are coming from worker control —

Mr. Silvers: Everything you are saying is actually not true. It is false. If you offer the deal today, bankrupt pension plan, PBGC benefit, the worst case DB scenario there is, vs. the median DC scenario for someone in their 50s, a 55-year-old person facing that choice today, no sane person would pick the DC solution because the DC solution is $60,000 to live with for the rest of your life.

Mr. Ferrigno: No, it is not.

Mr. Crane: The debate that you are having right here is a perfect example of what Kurt and I were talking about at the beginning here. We are continuing that old saw of DB vs. DC. And if we are —

Mr. Silvers: That's not true.

Mr. Crane: Damon, let me make my point.

Mr. Silvers: What I'm saying is this. There is simply not enough money in these plans. That's not the old saw of DB/DC. If there was enough money in them, you could have a different discussion. But there isn't. It is because the two groups that these guys represent don't want to put enough money in them.

Mr. Crane: I will agree that … when you are looking at average account balances of $25,000, (this) is the perfect example that makes your point of inadequate DC plans as a retirement vehicle. At the same time, we have DB plans in this country failing. So right now we have a great example of a debate over two failing retirement systems.

The question then becomes not what is better, this failed system or that failed system. It is how do you make both plans better. DB plans have a perfect place in the future of this country for providing safe and secure retirement systems. DC plans can do the same if they are designed and funded properly.

What we have seen in the past is that there are all sorts of reasons why DB plans are having funding problems and why DC plans are failing as well. Let's fix them. Let's overhaul them, and make them better.

Mr. Brainard: The flawed structure you are referring to with regard to DB plans is largely a result of well-intentioned, but misguided, federal regulations that drove a lot of corporate defined benefit plans away. With regard to the public sector, which employs more than 10% of the nation's work force, those regulations are irrelevant. They do not apply.

I think that if one examines the record in the public sector, we know what works. To be sure, there are some flawed plans there, some underfunded plans. But there also are many well-funded plans covering a large percentage of the public-sector work force.

We know what works. Ultimately, plan design is key. Whether it is a defined contribution plan or a defined benefit plan, the retirement benefits, the pool of assets, will be a function of contributions plus investment earnings minus the administrative expenses. We know the defined benefit plan is a far more efficient vehicle for delivering retirement (benefits) than a defined contribution plan. The defined contribution plan costs several times what the defined benefit plan costs.

Mr. Ferrigno: We need to remember a couple things about the DC system. One, it is about 15 years old, and it is growing by leaps and bounds.

When we look at account balances, it is the most deceptive number in the world. It is driven by two things: One, you have only been in it 15 years; two, we add about 4 million new accounts each year.

We all live and die by numbers in this town, but one of the most misleading is the so-called average account balance. EBRI/ICI (the Employee Benefit Research Institute and the Investment Company Institute) looked at some numbers based on people who have been in the system at least six years to get a totally different number. The average account balance was $102,000, the median was $55,000, and the median age was 44. We have to stop looking at this alleged $60,000, which is even low.

When we look at the DB system and when we look at the CRS (Congressional Research Service) numbers, they tell us for people between 65 and 69, one in five gets any benefit at all from the private sector. Public is different. And they are getting $9,000 a year, lump sum, which rounds out about $110,000 in a lump sum. When you look at all the population above 60, one in four gets some kind of private sector benefit. They are getting under $7,000 a year.

So we need to put it in perspective. Of course, we know one in four, their sole source of income is Social Security and retirement, and for 40% of the people, 90% of their income is Social Security.

We have to put everything in context. When you do that, you look at the DC system and you say — I can say with a lot of confidence — just looking at the numbers today, yes, you have to participate and, yes, you have to save. If you do that, you will be in real good shape. CRS came out with something a couple weeks ago that said if you do 10% of pay — which is pretty much in the ballpark when you figure in the employer contribution — if you do that for four years, you will have 92% income replacement, and Social Security on top of that.

So you have to participate. The employer has to offer a plan. If you participate, you are going to be fine. You have to remember you are looking at a system that is 15 years old.

Mr. Brainard: One thing that concerns me about the defined contribution industry is that it has not engaged in sufficient self-policing. There are management fees and expenses that corrode retirement accounts, driving down their value. Those defined contribution administrators in many cases, not all cases, are in business for themselves, not for the plan participants.

Mr. Silvers: It is also true that if you take 10% of your income and put it aside over a lifetime into a DC plan, you will have a fair amount of money. And, if you wisely annuitize that amount of money and find an annuity provider that gives you a good deal, you will essentially replicate a DB plan.

Assuming that a couple things don't happen to you. Assuming that you don't have the bad luck to do that annuity flip at the low end of the financial markets or when interest rates are adverse to you. You are taking a risk around the financial markets in that circumstance that, in fact, most individuals can't afford to bear.

One of the things about a DB plan that really can't be replicated in a DC structure very easily is that insurance against having bad luck in the financial markets, being born at the wrong time.

Mr. Brainard: Living too long.

Mr. Silvers: Living too long you can deal with if you annuitize and you do it in a fair way.

At every step of the game, though, you are disadvantaged because you are an individual out there; you are a sheep in a market of wolves buying investment services, you are a sheep in a market of wolves buying annuities.

However, all that said, that assumes that you are out there putting 10% of your income away.

Now, I think for most of us around this table and most of your readers, putting 10% of our income away sounds like a pretty reasonable thing. But if you make the median family income of $43,000 a year, that is a much, much harder thing to do, and the data show in fact people don't do it.

Why? Because they probably aren't making enough money to meet their everyday expenses, let alone put 10% away. We have negative savings in this country because our incomes aren't high enough. I think the numbers that Ed cited show it is not happening. When you look at middle-age people who are long-term participants in these plans, the median number is again just way too low to deliver the benefits.

Mr. Crane: Regardless of whether it is DB or DC, some money has to flow into a retirement plan of some sort for all the people we are talking about, the people who are making $40,000 a year and don't have another dime to spend. Ten percent, 12% has to come, whether it is DB or DC, and it has to flow in a way that it doesn't somehow leak away.

All of the things that you pointed out with regard to DC plans not being successful, again, coming back to the point of plan design can fix that.

We are moving toward it, particularly in the private sector, with some of the changes with the PPA (Pension Protection Act) recently, with auto-enrollment and auto-increase kind of things. Again, that is moving toward what has long existed in the private sector for DB plans. You walk in the door, you are a participant. You are in the plan. You don't have a choice. That's what the DC world has to move toward to have better outcomes than we have in the past.

It is an untenable situation for our society to allow a huge segment of our population to walk all the way through their working career and end up with just Social Security. So what can we do as a society to make sure that all of those people don't end up on public welfare.

As I think the public pension group, Keith, NASRA (the National Association of State Retirement Administrators) and NCTR (the National Council on Teacher Retirement) and others have well pointed out, we as a society can't have a retirement system that fails and then lets everybody end up with the social safety net cost, which is not pre-funded, which has an immediate cost consequence to us as a society and drains money away from everything else that society needs to do.

Ms. Webman: As long as we are talking about this, since studies show repeatedly that the single biggest factor determining how much a DC plan participant has at retirement is how much he or she contributes, what the deferral rate is: What is the ideal deferral rate?

Mr. Brainard: I think given the improved longevity and health care expenses, it has gone from 10% to 15%.

Mr. Clifton: I want to take a step back on the Pension Protection Act and talk about what we tried to do. A lot of the key provisions in there were in direct response to some of the points that people would make about the flaws of the defined contribution (system)… I think that we made great progress.

Now, it is too early to come out and make a sweeping “this is going to change the world” (statement), but I think over time we will be able to look back and say the improvements made were very beneficial by getting workers in.

We believe there will be about 15 million new workers with a defined contribution plan by 2009, and it (the PPA) will be fully implemented in 2008. Morgan Stanley (MS) just put out a note that this will triple the amount of defined contribution net inflows in 2008. This is a fairly significant way to address the problems we were just talking about, about getting more people coverage and getting their money in the market.

That comes from the automatic enrollment as well as changes to asset allocation, which we think are very important. Having a lifecycle fund … does two things. It puts people out of the money market fund and into a higher return balanced fund over their lifetime. You again have a feature of a DB plan: somebody else taking care of the asset allocation. But that worker now has individual control and ownership, which we think is the most important component for workers.

Mr. Silvers: What do you think the deferral rate should be?

Mr. Clifton: What it will start at is somewhere in the range of 3%.

Mr. Silvers: How would you propose that you personally would live in retirement on that?

Mr. Clifton: The salary deferral for that employee, I'm not saying 3% will be it, but you are talking about a 3% —

Mr. Silvers: You are saying 3% will be it.

Mr. Clifton: Let me talk. Three percent, with a 3% employer contribution match. Now you are at 6%. I believe that is where it will start. You can't just go in to people and say this is what the number is going to be, 10% mandated.

My point is that we are making progress. We have to get these people in. We know once they get in, they just let it keep going. That's what our academic and empirical studies tell us. That's why the legislation was formed that way. I think we are making great progress. I believe we will be able to get up to 10%.

I would also say for people in the median income, it is not a stagnant number. When I was in graduate school, I was the lowest income American. Hopefully, by the time I retire, I'm moving up the scale. There is a lot of dynamism in the income stream. I don't think that we should be looking at it as if this is the income for a median family, and it stays at $40,000 and they will never be able to contribute to their own retirement.

Mr. Silvers: But if you think about that fact … that people have higher incomes as they age, then the numbers associated with the plans are even scarier.

Mr. Clifton: I understand what you are saying.

Mr. Silvers: If you have the median income — a lot of people have that … when they retire, $45,000 a year — you need $200,000 or $300,000 in your account to get to Social Security and not suffer a decline in living standard when you retire. …

Now, if you look at that number and think that, in fact, people when they retire, their median incomes are more like $60,000 and $70,000, which is what you are saying, then you need $500,000 or $600,000. That money is simply not there.

If everything you say is true, those folks who had the bad luck, for example, to have a defined benefit plan stripped away from them just as they came to be vested, which is what the private sector has done to American workers in the last 10 years, that whole cadre of people are looking at retirement with $50,000 and $60,000 of total plan balances, total assets trying to replace income of $50,000 to $60,000. That will only work if your life expectancy is measured in months and not in years.

Mr. Ferrigno: Using that as a proxy, using those numbers, what you are talking about is someone who relied on a DB plan, and the DB plan went away. Now they are in their early 50s, and they are going to try to catch up in the DC system. Well, the DC system will not work. We will all agree with that. I think you have to save 30, 35 years. If you do that, every single indication is that on average you are going to be at least as good off as, on average, the U.S. worker is in the DB plan.

Mr. Silvers: All those “ifs” are so heavily weighted toward higher income people.

Mr. Ferrigno: No, they are not. I'm shocked at how successful we are in capturing workers in the $30,000 to $50,000 income range. We get two out of three of them and they save above 6%.

Mr. Silvers: I'm shocked at what you consider success.

Mr. Ferrigno: How many of those people in the $30,000 to $50,000 range end up with a 40-, 50-, 60% income replacement in a DB system? You know that the DB system is geared toward the higher-paid individual.

Mr. Silvers: No, it is not geared toward higher-paid individuals. It is geared toward longer-in-service individuals.

Mr. Ferrigno: Which is a function of how we pay.

Mr. Silvers: Over time, it is.

Mr. Brainard: Not for everybody.

Mr. Ferrigno: We are going to be OK.

Mr. Silvers: The problem that you all are bumping into is that in order for your story to work, the total fund contribution rates have to be in the range of 10%.

Mr. Ferrigno: We are in that range now.

Mr. Silvers: And everything else has to happen. And you are not in that range now.

Mr. Ferrigno: Yes, we are. We know the average saver saves between 6% and 7%. We know that most employers match with about 3%. So we are there.

Mr. Silvers: When you look at your plan balances, they do not show that. And when you —

Mr. Ferrigno: I create 4 million new accounts every year. When I look at my account balances of people who have been in the system, it is a very good picture.

Mr. Silvers: People who have been in the system.

Mr. Ferrigno: TIAA-CREF is here. Why don't they talk about their ability to improve benefits for individuals.

Mr. Silvers: I'm certain that higher-income individuals who have the ability to —

Mr. Ferrigno: TIAA-CREF has janitorial workers working in universities.

Mr. Silvers: There is a real world out there. And in that real world, the median plan balance is in the $60,000s. That is the money, and those people do not have —

Mr. Ferrigno: I just told you what the median account balance is.

Mr. Silvers: The median account balance is in the $60,000s.

Mr. Ferrigno: How old are they? How long have they been saving?

Mr. Silvers: That is the median total sum held by families with the primary income earner in their 50s.

Mr. Ferrigno: I don't agree with that number. I know that number has been kicked around.

Mr. Silvers: What is your number?

Mr. Ferrigno: The ICI/EBRI number says if you have been in the plan at least six years and you are in your 60s, you have $181,000. You are saying the system doesn't work because people haven't participated, and it has only been around 15 years.

Mr. Silvers: I'm concerned about the totality of the American people. You are concerned about your high-income customers.

Mr. Ferrigno: What is the totality of American people in the DB system? It's not a good picture.

Mr. Crane: Let me jump in here now. I had the invitation.

Mr. Ferrigno: Yes.

Mr. Crane: The conversation is fascinating because it does point out, I think, a different lesson than what we are talking about here. I think the lesson, some of the concern, is (that) we have a DB plan, it fails, it gets sent over to the PBGC, and people are getting 60 cents on the dollar or less …

The question is why did that DB plan fail and what can we do differently to make that DB plan more successful going forward.

We mentioned earlier that the federal standards, the maximum funding limits for DB funding, are causing major issues. You have to put this much in, but you can only put that much in, and in bad times, boom, all of a sudden this DB plan looks bad. A corporation that has a short financial horizon, not 30 years, not 15 years, maybe five days —

Mr. Silvers: 90 days.

Mr. Crane: Or 90 days, they look at that and say, “Why do I want to take that funding risk? I have my shareholders I have to report to, and I have FASB 87 changes that are saying all that unfunded liability will end up on my balance sheets now. Why do I want a DB plan?” That tells us something not about the quality of DB plans. It tells us something about our funding policies and our retirement policies on a national basis.

I know the value of DB plans. They really do need to continue because of the security they provide.

The better question is: What can we do as a society to make those DB plans whole and better and successful and use DC plans where they fit. And they do fit in the right places and the right circumstances.

It is a travesty that they (defined benefit plans) are going away in the corporate world, because we have a mismatch of national retirement policy, funding policy, tax policy … You can deliver effectively funded DB plans, but it is really hard to do under the current environment.

And because it is really hard, let's not be surprised that corporate entities and some public sector entities are looking to say, “We can't handle the short-term volatility of these plans any more, let's move to the DC plan.” Then the question becomes if we are moving to DC plans because of some other bad policy that we can't deal with now, let's make sure the DC plans become a better vehicle than they have been in the past.

You are right. DC plans have a lot of warts. But we are moving in the right direction. Let's not condemn DC plans if they are the only vehicle that an employee has. Let's make that vehicle better. Let's do the things that are necessary in order to have that 10% to 12% over time, making sure that that funding level is properly there, that there isn't pension leakage in terms of hardship distributions and loans and there is some form of mandatory annuitization going on here to make sure the longevity issues are taken care of.

To deal with each of those risk areas through plan design, we can do it. It is being done. DB plans are evolving. DC plans are evolving. The worse thing we can do is let each of them stay where they are.

Mr. Clifton: I think your points are good; right on the money. There is still 20% of the private work force that has a defined benefit plan. That's something that we tried to do in the Pension Protection Act. We tried to strengthen it so the workers' pensions get funded.

When I talk about my advocacy for DC, it is not saying that I hate defined benefit plans per se. We need to make both programs stronger.

But at the same time, if I was an employee who started at GM 30 years ago, the world was very different for GM. You had a 30-year horizon. They had 50% of market share 30 years ago. They had a AAA bond rating. They were flush with cash. They made promises … that they thought they could keep, but they couldn't because the economy changed. And there is a lot of uncertainty for the workers who get into those types of deals.

I think it is something that needs to be taken into consideration. This is a very global, dynamic economy that we are in, and these (defined contribution plans) provide the flexibility. So within the short term, I also think there are long-term considerations that companies need to make to be able to work with their employees.

Mr. Brainard: Are you saying that you believe there is a place for defined benefit plans?

Mr. Clifton: I didn't go that far. What I'm saying is —

Mr. Ferrigno: Of course there is.

Mr. Clifton: There absolutely is.

You are talking about 20% of the private work force, 90% of the public work force. I am not trying to throw that out.

I have been accused by leaders in your organization of trying to throw out defined benefit plans. I think that we are missing a point in this discussion. We are talking about the level of benefits a worker gets; that's my No. 1 priority.

My point to NASRA is: What are the political dynamics of the pressures on the state and local government officials as far as raising taxes? We try and identify those dynamics. There is a growing burden at the state and local level on retirement and health care. We are trying to operate a system that can deal with these pressures that are growing with them. What is the pressure on companies that are faced with pressure from their shareholders and employees? What is the pressure on state and local elected officials, because they have to manage both the taxpayer risk and the public employee risk?

We are trying to find some middle ground.

Mr. Silvers: There is a lot of complexity in this debate, but the real issue is very, very simple from the private-sector employer perspective. And that is the difference between the number nine and the number three. Nine is basically what you pay, what the employer pays, in a typical DB plan to cover plan expenses over the long run. And three is the most an employer pays out under the typical DC plan structure.

Mr. Clifton: I didn't say that. I said salary deferral for that employee was 3%.

Mr. Silvers: And three is the high end.

Mr. Ferrigno: It is not.

Mr. Silvers: When you have a 3% match, the real number is 1½%.

Mr. Ferrigno: You are ignoring all the other costs.

Mr. Silvers: The other costs in the DB plan are trivial. That is the real —

Mr. Ferrigno: How much does an employee contribute to a DB plan?

Mr. Silvers: It depends on the plan structure.

Mr. Ferrigno: Certainly you are not going to argue —

Mr. Brainard: In corporations, they don't contribute, generally. Public sector, they contribute about 5%.

Mr. Ferrigno: Would you (say) that the individual doesn't contribute to the DB plan in forgone wages? Of course they do. You have made that point quite strongly.

Mr. Silvers: When employers retreat from DB plans in the current labor market environment, they don't have to raise wages. They pocket the difference.

Mr. Ferrigno: I'm not disagreeing.

Mr. Silvers: As Daniel put it, in today's competitive environment, to be able to pocket 9% of payroll, imagine what that means. And that is what is going on here.

Mr. Clifton: They are having increasing health-care costs.

Mr. Silvers: And that is what is going on here. And in the public sector, what is going on here is a bunch of very wealthy people contemplating how much money they will save on their tax bill to deprive a firefighter of a pension and a death benefit. And those people can buy very talented lobbyists.

Mr. Ferrigno: The question is: With the demise of the DB system in the private sector and the growth of defined contribution system, what is the impact of that for workers: Are they going to be better off or not?

Every indication I have and every study I have read, you look at the numbers and look at averages, and there is every indication in the world that the DC system is going to keep the individual at least as whole and have a bonus of wealth accumulation to it.

The real key is: Are people going to be as well off as their parents. Everything we read, of course, even now for the baby boomers, indicates they are going to be. They will have to be because they will live a little longer.

Mr. Brainard: Your characterization works on paper. But in life, there are too many variables for that to work in a large number of cases. One of the problems with retirement, public and private sector alike, is there are too many people who have an interest that is not consistent with the interest of the retirement participant, too many people who are making money that has nothing to do with the welfare of the retirement participant.

Mr. Silvers: Study after study shows median household wealth declining in the last 10 years for the first time since before the Depression. In fact, it's the opposite of what you are saying is happening.

Mr. Clifton: That's completely wrong.

Mr. Silvers: It is absolutely true.

Mr. Ferrigno: If you show me a study, I can show you one.

Mr. Clifton: It is more than what is in the retirement income. The greatest boon to middle-class families over the last seven to eight years has been the growth in their real estate. … Are people going to be able to retire? If you are looking at just the 401(k) balances without all the other components to it, it leads to a very misleading picture.

Mr. Silvers: Many people had the following thing happen to them over the last 10 years: They traded their pension for their home. This was not a sort of bizarre coincidence. It had to do with the way interest rates moved and the effect of interest rates on the defined benefit plan assets and obligations. The wonderful thing about that is that some of those people actually sold their homes and managed to liquidate them. The rest of those folks are stuck with an undiversified asset that is collapsing today.

Mr. Ferrigno: I don't know if collapsing —

Mr. Clifton: It is only growing by 3% a year, rather than 10%.

Mr. Silvers: Is there a newspaper around here? Would anyone like to take a bet on the housing market? Be serious.

Mr. Clifton: The accumulated value of people's homes substantially went up. When they retire, they sell that home and they will move to a smaller home and take those equity gains as part of their retirement. This is no small chunk of change. You are talking about $100,000 to $150,000 profit.

Mr. Silvers: The people who have been fortunate enough to have that thing happen to them — and that depends on a whole lot of circumstances — that group of people has just moved from a pension plan that had substantial protections against market volatility to a single asset, which has none.

Mr. Ferrigno: A tiny sliver of them moved from a pension plan, a tiny sliver of people that worked the last 30 years of their career.

Mr. Silvers: So this is not important?

Mr. Ferrigno: Of course it is important. You make it sound like everyone in the DB system retires with 30 years and 60% income replacement rate, of course, indexed for inflation with 100% percent QJSA (qualified joint and survivor annuity). And we know the world is very different from that. We are constantly put up against this unrealistic standard. Look, public sector DB is different than private sector DB. You are not likely to lose your job. Your employer is not going to go out of business. There is huge political pressure for them to keep the plan.

Mr. Silvers: I will give you a couple of concessions to show I am not the character you paint me.

I think it is important, for example, for something to be done. As you say, DB plans are not all the same. There are some multiemployer plans that share the specific employer risk. The tight linkage of some private sector DB plans, some very big ones, to specific employers, has turned out to be in the context of regulatory failure, and some of the short-term pressures that things like the PPA have put on have been a dangerous thing. So the degree to which it is possible to deal with this issue of portability in the DB context, which I think goes to Rod's point about change, is a very good thing. Public policy ought to encourage it. We ought to move in that direction, as some of our industrial country competitors have done, no question.

That single-employer aspect of DB has turned out to be a land mine.

It is also true that there are a wide variety of DB structures and that some of them were outrageously kind of weighted against the short-term employee, and that is also not good. And a variety of deals and arrangements got cut in the post-war history that sort of moved costs around and allocated them in different ways. And to Rod's point, fixing that kind of stuff is important.

We are not going to have a retirement security solution for the majority of Americans who need one if we just say, “Well, I'm going to hold on to my single-company plan and that's what we are going to do.” That's not the future. And it is not a solution.

But the solution has to include dealing with what is currently an overwhelming incentive for employers to effectively walk away from adequate funding. It has to deal with investment risk and place it on institutions that can bear the risk, and not on individuals who cannot, and it has to deal with longevity risk. The solution has to deal with those things in a cost-effective way, which comes back to all these studies that Keith began with about what is a more or less effective way to manage money and manage risk. Those are the places we need to go.

The problem with that solution is going to be that it is going to cost real money. There is no getting around it.

Mr. Crane: I think we will all concur on that.Damon, I have a question for you. You mentioned the single-employer approach for DB pensions has problems. The AFL-CIO, I think, has been talking about some sort of national retirement program. Can you elaborate on that at all?

Mr. Silvers: We haven't moved from the thinking-about-it stage to the drafting-of-legislation stage.

We are interested in something that has the features I just outlined. The AFL-CIO Benefit Council put a statement out about this in August. The key points it made were we need to be looking toward 70% income replacement as a public policy goal for people who have worked a lifetime, that there needs to be a common standard for all employers, … that individuals can't bear the investment risk, that we need a system of money management that's cost-effective and deals with some of the conflicts issues that Keith was raising, and most fundamentally, that everybody has to play.

Really the problem today is that everybody is not playing on the employer side.

And I think ultimately the kind of solution we will be looking at in retirement — and I wouldn't want to go much further than this because we haven't made up our minds … — the ultimate solution may look something like what we said about health care last week, where the AFL-CIO endorsed an approach that said there needs to be an ability of all Americans to participate in Medicare, and if an employer is not willing to pay for its employee to do that, the employer has to do something comparably serious in terms of a private-sector effort.

I think that type of approach that creates kind of a standard package and then allows employers to do what they want, as long as the economics are comparable, is kind of where we might be heading.

Mr. Crane: There is a lot of merit in ideas like that; that have as the fundamental starting point (that)we need more participation in the work force in a retirement plan.

That is one way to get there. We won't debate it probably today. It is the direction we need to go. There are too many people who fall off and don't have any retirement savings at all in one plan or the other. It doesn't matter.

I think it is also important to realize we are probably not going to jump into that kind of solution overnight. Like you said, it costs money. Where is the money now? We are already talking about not having enough money for the 100 other things that this society is asking for.

But, again, I think we need to not assume that there will be a DB-only solution here. My guess is it's going to be some sort of compromise approach, much like what you are seeing in the public sector, the combination plans, DB component with some DC component, some shared funding from both employer and employee, managing the investment risk, managing the longevity risk. I think that's where we are likely going to be heading. We are almost pushed in that direction by default because there isn't enough money for the employer, and there isn't the ability to absorb all the financial risk, either at the employer level or the national level. … The capacity isn't there.

Mr. Winkelmann: One other point in terms of increasing participation rates that I think is important to keep sight of, particularly with the big contracted features of defined benefit, is the fact that there are scale economies and access.

Particularly the access issue I think is very important in terms of access to application of skill base and strategies. The kinds of things that institutions can get access to we as individuals simply can't. And those things actually make a difference in terms of having higher-than-average expected returns.

So the participation rates are important … but the second part is that (they) actually build enough scale economies and create opportunities for access.

Mr. Brainard: One of the questions you included was the effect on capital markets.

Ms. Webman: That's what I want to get to, yes.

Mr. Brainard: I would like to kick that segment off by saying that public pension funds hold roughly 8% of the nation's entire equity pool. They are also significant investors in investor capital, private equity.

The dismantling of public pension funds would have a material effect on capital markets and their ability to access private equity.

Mr. Winkelmann: I actually thought about all the questions. But I think there are kind of two issues here.

If we do the thought experiment, which I think we will all agree isn't going to happen, that all of a sudden every defined benefit plan is closed and will shift to DC, it isn't going to happen. I think we all agree it is not advisable to happen. If you did that thought experiment, yes, there would be a transition effect, but the equity has to go and be held by somebody.

So … I think the aggregate capital market effect is probably pretty close to zero.

That said, what I suspect we would see happening is investments in things like private equity would go where the pools can take advantage of it.

For instance, if you think about the typical endowment, which is already a significant private equity participant, that's going to look much more attractive.

On the other hand, think about access for individuals, and unless the pools get large enough and there is professional management, it is hard to imagine how people are going to take advantage of it.

Mr. Crane: I think I have two takes on this one.

One of them is if I was sitting on a retirement system board and I was a trustee. I put my fiduciary hat on and I said I don't care what happened to the capital markets, if the plan design is such that it is one that works, I will find the investment strategies that work best for delivering the benefit promised that this plan is designed to make …

There may be, unless DC plans evolve, lesser alternative investments going on.

Having said that I don't really care, I guess on the other hand, I think DC plans will evolve and you will have movement toward more target maturity lifecycle funds, which do have those kinds of investment pools in them and do invest in those kind of strategies.

To the extent that we have annuitization happening more in the future, those big annuity pools like ours invest in those kind of strategies.

I think basically I'm agreeing with Kurt, that you may have a shift in how the money gets there, but it will get there nonetheless.

Mr. Clifton: The shift is also very gradual. If you move from a DB to a DC in the public arena, there is still that huge pool of assets.

We know that when people go in, they stick with what they know. They are sticking in that defined benefit, and very few people go out. I think that is one of your key talking points. As the newer workers come in, they start choosing the DC.

You are talking about a full generation before you get that swing, and you still have the existing assets there that can still be invested.

Mr. Brainard: A full generation to slowly but surely dismantle this very rich pool of capital for the venture capital markets.

Mr. Clifton: The debate on defined benefit, defined contribution in the public sector is very different.

What will ultimately determine that switch is not what is happening in labor markets and global competitiveness. It will be politics, and politics in the sense of where is the political support to do what is in the interest of the public employees and the taxpayers at the same time.

Keith, I continue to say that the biggest risk to public employees is sort of the equivalent of a $600 hammer at the Pentagon. We can yell at the federal government and say that Washington spends $2.7 trillion and taxpayers don't mind, but they can understand the hammer.

We know that the pension spiking and the double-dipping have a negligible effect on budget ratios or anything like that. But the taxpayers are going to be outraged over that, much more so than, say, a future unfunded liability that they don't even recognize.

Governors and legislators who I talk to …. are very worried about how they are going to make funding decisions in education, health care, transportation, while trying to deal with retirement and health care benefits.

I think that will ultimately define the debate, but it will be a very slow-moving process before you get there. I don't believe it will be a dismantling of the public employee retirement system.

Mr. Brainard: But even if you close off a traditional pension system, which has been discussed and has actually occurred several times, suddenly the asset allocation for that system will have to become much more conservative.

Even if we don't dismantle it overnight, their asset allocation will have to change, their risk profile will have to change.

Mr. Winkelmann: Actually, I don't agree with that. So they close the plan and go to a structure more like the corporate system, a closed corporate scheme, just for an example.

In the corporate world, you want to immunize the interest rate sensitivity of liabilities, but you still have to earn a return on the portfolio.

So will the risk structure change? Absolutely, it will change. It will be more liability focused. That I agree with. Does it preclude those pools of capital putting assets to work across the broad spectrum? Absolutely not.

Mr. Silvers: I think in those situations, in the private sector, because of the sensitivity of the management of those assets to volatility for reasons having nothing to do with the pension fund, to go to your point about fiduciaries, that's not really where they are thinking. They are thinking about the corporate balance sheet and corporate income statement because of things that the Congress and PBGC and FASB are doing to really drive that volatility home in as painful a way as possible, which, frankly, makes me very suspicious about people's intentions.

The punch line to all that is if you are sitting there as the financial manager of that fund, you are aware of all those things, all the various gifts Daniel brought us, and you know who is paying you, what they want; you are going to immunize.

By immunizing, you will leave all the asset classes that Keith is concerned about. You may immunize by going to see somebody who themselves may be investing in riskier assets.

Mr. Winkelmann: That's right.

Mr. Silvers: But there you are doing two things, I think.

One is, I think, that chain of investments is likely at the end of the day to have less money in some of these riskier assets than prior to the change. Secondly, it will be more expensive.

This is a subset of a larger dynamic that is really quite amusing because it is so contradictory.

When you start talking about where the future of DC plans goes and people talk about contribution rates and essentially forcing people to contribute, and asset allocation and essentially saying, well, you know, the reality is we need to have this money invested in ways that generate DB-type asset allocations. All true.

But what do you end up with? You end up with essentially a system that looks more and more like a DB system in that these people, the participants, really no longer have any kind of meaningful control of where the assets are being invested because it is not intelligent for them to have meaningful control.

When I was in business school, one of the brightest financial academics who was teaching the class was asked what should we, these very sophisticated business students, do with our money. And he said… either buy a Bloomberg terminal and make it your full-time career or put it in index funds.

So the reality is that if you are an individual investing, either you should basically play the indexes, in which case the private capital ain't going to happen, and the returns will be less than they would be if you had a very cheap system of asset allocation and professional money management, or you basically turn it over to somebody who will make the decisions for you because you neither have the time nor expertise to do it.

At that point, you have a DB-style investment system and a DB-style contribution system. The only thing that you don't have is DB-style net contributions and DB-style risk management. You are still bearing risk you shouldn't be bearing.

All this stuff about individual choice is basically a snow job.

Mr. Clifton: It is not a snow job. I have Gerry Shea who fought tooth and nail to keep the AFL-CIO members in control of their investments when John Corzine tried to regulate it after the Enron collapse.

He went in to the Wall Street Journal and said our members value having their own individual choice and control of their accounts. These are his words, not mine.

How about the people who are working jobs five years, five years, five years, five years? A DB system does nothing for that person. They are getting a smaller check from a couple different places that lasts their lifetime.

Don't tell me —

Mr. Silvers: Daniel, you are very well trained; you are shifting the subject again.

Mr. Clifton: I was answering your question.

Mr. Silvers: What you did was made a personal canard and then changed the subject.

The reality is that any plan for getting good returns out of a DC system takes away personal choice. Everybody knows that, except the poor fools who listen to you.

Mr. Crane: I think that is really one of the fundamental policy questions here.

Does participant choice (work), when we are talking about core and primary retirement plans? I think, so far, the conversation is maybe it doesn't work so well, and the lesson we are taking from the conversation is maybe DC plans need to move toward less participant choice or maybe no participant choice.

When you are talking about the core retirement benefit, as opposed to the additional wealth accumulation from voluntary savings and so on, from a national public policy, from an employer retirement policy, shouldn't we be first saying having an adequate and secure lifetime income during retirement is the primary goal of a core retirement plan, whether it is DB or DC? And shouldn't the structures and the plan design, investments around that match that objective?

Mr. Brainard: Great point. It is an undisputed fact that most people would rather have a professional manage their retirement assets than do it themselves.

Mr. Ferrigno: One thing we are going to see as a result of the PPA, something that I was very heavily involved in, was dealing with default investments. When you are in a default investment, you are turning it over to the company to manage. I think that you are going to see significant changes in default investment.

The more automatic enrollment you see, of course, the more default investment. But you are also going to see people who are not automatically enrolled opting in.

We know in our very largest corporations … 80% of them have been managing multibillion-dollar defined benefit assets for years. Today they offer plan options that they manage themselves at incredibly low cost. So for the default investment, they are going to morph right into their defined benefit culture.

I think that's going to be a positive attribute. When we started this, the companies were managing the money and the profit-sharing plans. There are companies today that do that.

Mr. Crane: Old Taft-Hartley money purchase plans were all trustee directed.

Mr. Ferrigno: On the other hand, you have to understand that you have employees who very much want choice. Hopefully the employer screens the investments, and screens them properly, and has a narrow range. You don't want to see any tech sector funds in a plan.

The key — everything that we have read tells us the most important thing in the typical plan — is that you contribute, and your rate of contribution; not the difference in your investments.

But we are going to have default investments, automatic enrollment … There are exciting things happening in the world of annuities, and it is not a mandatory annuity option in a plan. Finally, there is competition taking place in annuities. There is innovation.

We have to remember that though Damon talked about portable DB plan, we have a universal employer-funded portable defined benefit plan in this country — 90% of what you are talking about exists; it is a matter of tweaking it — that's called Social Security, which pays a wonderful annuity. We think clearly the debate about the future of Social Security is decided. It is obviously a very good complement to the defined contribution system.

There is tremendous criticism of people for not annuitizing their DC money. But when you look, are they actually behaving quite rationally when they look at what percentage of their retirement income is already received in the form of (an) annuity, 100% QJSA?

I'm just wondering politically whether you can tweak the Social Security system to get what you are looking for.

Mr. Silvers: There are people who have suggested that one of the ways to deal with the gap that is emerging is to enhance Social Security or to provide a way for employers to choose to enhance Social Security for their employees or to collectively bargain that outcome. That would obviously be one of the more structured ways of achieving the kind of things that I was talking about earlier. And there are pluses and minuses to doing it in a heavily structured way.

One of the pluses, of course, is that there it is. One of the minuses is that — well, there are a couple minuses. One is that the Social Security system is a pass-through system primarily, not a funded system. I think Keith's point that if you wanted to maintain the kind of robust capital markets effects that come from having funded systems, that might be an issue.

There also is sort of the question of the extent to which you want to allow all the kinds of innovation in the private sector and in the state and local government sector that I think Rod has been advocating throughout this conversation.

So those are issues. There are certainly people who advocate for doing just what you suggest, which is to enhance or beef up Social Security as one approach.

Mr. Halonen: What percentage of 401(k) assets currently go to fees, and is it reasonable the way that those are set up now? Do you think Congress should be somehow involved?

Mr. Ferrigno: There are companies that manage the 401(k) assets for one basis point. They are the very largest companies. At the opposite end, although we took a lot of issue with the slide at the hearing (the House Education and Labor Committee hearing chaired by Rep. George Miller, D-Calif.) last week that had two figures on it, 401(k) plans it is 3% and TSP (the federal Thrift Savings Plan), six (basis) points.

The 3% from what we can see is an aberration, even at the very smallest plans.

Mr. Brainard: What is typical?

Mr. Ferrigno: It depends on size.

Mr. Brainard: What is typical for a typical plan?

Mr. Ferrigno: There is no typical plan. Could it be lower? Absolutely.

Mr. Brainard: Excuse me one second. Daniel, do you agree with the comment that Matthew Hutchesonsaid last week, that “a large portion of the costs of conventional 401(k) plans relate to services that have little or nothing to do with building or protecting retirement income security and, hence, are excessive?”

Mr. Clifton: You are aggregating all of the 401(k) providers together. The larger firms provide specific services for each 401(k). So you can get a range of packages. The smaller guys offer everything together in one package because that's all they can do.

What (Rep.) Miller is trying to do — because, believe me, I'm for lower fees, both for myself and for my members — could have severe consequences where he starts going after the smaller providers and starts limiting competition in the mutual fund industry.

We also think there is a trend away from the existing mutual fund structure. We haven't figured out how to do this yet.

Once we get into a system of exchange-traded funds, it is hard to do dollar-cost averaging because you get hit with a fee on the actual trade execution.

What the very smart people are trying to figure out right now is how you can aggregate all those assets together, such as in a state government where you have a large work force, and reduce that fee. That puts you in the 20- to 30-basis-point range, where exactly you are at this point. I think that's where we are going. ETFs have $400 billion in assets, but represent 4% of all mutual fund assets really in just four or five years of growth.

It is not comprehensive to look at the entire structure because those are the small funds and they have less customers. People should not be paying 107 basis points or 200 basis points, in our opinion, for fees.

Getting into the range, the average right now is about 70 basis points, and we are working to get it down to 20 or 30.

Mr. Silvers: You think 70 is the right number —

Mr. Clifton: I just said 20 to 30.

Mr. Silvers: In terms of understanding what it is, you think that 70 is the right number?

Mr. Clifton: For the range of services that people get. But I am not defending the mutual fund industry.

Mr. Silvers: I just wanted to know what the number is.

Mr. Ferrigno: The number ranges from basically 1 basis point at the large corporations to somewhere in the 2 to 2½ range.

Mr. Crane: Are we talking about administrative plus investment?

Mr. Ferrigno: We are talking all-in.

Mr. Silvers: All-in is the only number worth talking about. We think it is what?

Mr. Crane: One basis point. The typical defined contribution plan is going to run, in terms of administration for bundled services, all the individual account record keeping, probably with investment advice and personal one-on-one services and group meetings and all that is probably going to be around 50 to 70 basis points total.

That's not that much more than the cost of running a DB plan.

Mr. Silvers: The investment options chosen in that scenario are what?

Mr. Crane: It will be the standard mix of 15 to 20, 25 funds. You will have a wide range of investment management fees that run through it.

Mr. Silvers: When you aggregate them, they are part of the 50 to 70?

Mr. Crane: Yes.

Mr. Ferrigno: That's your business, right?

Mr. Crane: Yes.

Mr. Ferrigno: That's a point. Of course, points mean nothing. They are the function of average account balance. We need to look more at dollars ...

Mr. Silvers: What the data suggests is that scale matters. The other thing that matters is whether somebody is actually watching out for you, the participant; somebody who has an incentive to do so.

Employer behavior around this sort of thing varies a great deal. There are some employers — and I think you described them — where there is a culture of, “We manage a lot of money on behalf of our employees and, by God, we do it right,” … and attentiveness to the ultimate investor.

There are other situations where a variety of other things apply, ranging from indifference to actual collusion with money managers when there is some common aim in mind. I think, frankly, that probably indifference is the biggest problem, and also the other problem, of course, is simply bargaining leverage.

You have to get to a pretty large size plan to have meaningful leverage in these discussions with the mutual fund industry, be tough customers in relation to these things.

The upshot, though, I think — and Keith probably has all these numbers better to mind — is when anybody looks at this question, you end up with fees and total costs being a significant disadvantage of the defined contribution system as is.

You could fix that. That is not an unfixable thing.

Mr. Crane: That's right.

Mr. Silvers: It is probably pretty important that it be fixed, because as someone once said about DB plans, these plans aren't going away. They need to provide these services at an appropriate cost. They don't now.

Mr. Ferrigno: Everyone is looking at the hearings in the House, and they (the Labor Department) have already announced one that they will finalize the Form 5500 this month, and there are two other initiatives this way.

The world is going to change significantly. I think when we look at the companies that offer DB plans, the DC side looks fine. The big companies are fine. They are very aggressive.

Mr. Silvers: When you get both plan structures and you have a sort of professional —

Mr. Ferrigno: In that area, you have in-house professional people. In all plans, the largest account-holders are the owners. They are the decision-makers. So they have a huge vested interest in the system. Generally, self interest works well in this instance.

Then you always have those guys working in finance, if you are a medium-size company … you have instigators, and they are the people with the most money in the plans. …

Again, we have only been around 15 years. Look how far we have come. We have a ways to go.

Increased transparency, we very strongly support it. … There are vast improvements to be made. It is happening; competition is going to help. The market is pretty saturated. We know exactly, we know with laser-sharp certainty, where the problems are.

The problems are companies (with) under 50 (employees), especially those with less than 25, and people in the first quintile (of income).

Mr. Brainard: How concerned are you about leakage, which is a primary problem with the defined contribution plan? … The federal government collects a huge amount in penalties each year from defined contribution plans.

Mr. Ferrigno: There has been a major change in leakage … Previously, if you had less than $5,000 in a plan, the employer could cash that money out. They would send you a rollover notice. If they didn't hear from you, a check showed up in your mailbox.

There has been a quantum change. Now the same process goes: They say you have $4,000 in your plan, what do you want to do with it, and they don't hear anything. The next thing you hear is your money has been put in an IRA. We are hopeful that will make a significant change.

As far as leakage in the far end with the retirees, I have never seen anything. There is need for improvement there. The myth that the 60-year-old goes out and buys a yacht (isn’t true). Any statistics on leakage are moot until we can see how the new law kicks in.

Mr. Brainard: That is interesting given federal revenue from the excise tax and the taxes, the penalty and the taxes that are paid on defined contribution plan leakage.

Mr. Clifton: But you wouldn't have that data beyond 2004. The 2005 numbers aren't out.

Mr. Ferrigno: There are pros and cons to hardship distributions. Some of it is defaulted loans ...

We do know that access to the money in those kind of situations — GAO has done studies — is very important to get in the lower paid worker to participate in the first place.

Do we like no leakage; do we like no hardship distributions? Yes. If you are a victim of Hurricane Katrina, yes, you set back your retirement savings. On the other hand, you have some money. It is a mixed bag.

Mr. Brainard: Part of the point I'm trying to make is the federal government … is the federal government makes money when people cash out of their defined contribution plan.

Mr. Clifton: Absolutely.

Ms. Webman: We did this survey with Oxford (University). One of the things that most of the respondents said was that (corporate) DB plans harm the economic competitiveness … of a company. So my question is two parts: One, do you agree or disagree, and then, secondarily, if that is a problem, what can be done. You still have a DB plan, but what can be done to ease that concern?

Mr. Brainard: The federal government could certainly become a little more accommodating with regard to defined benefit plans. It would be nice to see the federal government, as a policy, express interest in having defined benefit plans rather than seeing them closed off.

One other thought with regard to that study. There are still a number of corporations — primarily large corporations in the United States, such as GE — that have a thriving defined benefit plan. And they stand by their plan; they believe in their plan, believe it is an important part of their ability to recruit and retain employees.

As our society continues to slowly but surely age, employers such as GE will begin to realize, if they haven't already, that they need a defined benefit plan, along with other parts of their compensation package, to be able to continue to attract and retain the qualified personnel they need.

One last thought, if I might. I thought one of the interesting things that came out of the Oxford study was the observation that today's corporations do not have a lifecycle long enough to match the lengthy liabilities that a pension promise creates, an issue that does not apply to the public sector.

Mr. Clifton: I haven't read the study. I apologize for not seeing it.

But I can tell you that we believe the growth of defined contribution is not so much from the regulations that were put on in '74, although that did have something to do with it. It is not even the creation of the 401(k) section of the tax code. It was the response to the changing labor markets, both here in America and … internationally.

You are at a point where 80% of all retirement is now a defined contribution and 56% of assets. There is a reason why.

The growing unfunded liability is a real threat to companies to be able to make investments and compete internationally. We have an aging work force. So the capital is not there to be able to compete with other international firms. I believe that they see it as that type of liability that is hurting them from moving forward.

I like to think we are in a similar situation where Europe was 20, 30 years ago, where they had to make changes in how their economy worked and their social welfare programs. They kept the status quo going and didn't make reforms. They are continuing to suffer from economic competitiveness.

We are trying to come up with a system that can provide retirement security and make the economy more efficient.

Mr. Brainard: May I interject a real quick comment on something Daniel said about mobility?

The study came out last year from the Center for Retirement Research at Boston College that found the onset of 401(k)s had more to do with increasing mobility than increasing mobility generating more 401(k) plans.

Mr. Ferrigno: I read it. I thought it was an interesting observation. But other than that, I didn't put much credence into it. It was an interesting read.

Mr. Brainard: I think you can't take for granted that we are more mobile, therefore, we need DC plans, when in fact it is possible that we need —

Mr. Ferrigno: Some people desire to be mobile; 401(k) plans help them move around. It was an interesting read.

Mr. Silvers: There is a different narrative that needs to be brought forward in response to this question.

Starting as a result of the 401(k) revolution, a lot of changes have occurred in our labor markets.

Starting in the 1980s, it became possible to run a major corporation without providing meaningful retirement security to your employees; simply not spend the money.

Whether employees chose to spend it themselves and to save that money themselves was sort of their call, and most didn't do it. But it became possible to run a company in that fashion, particularly to recruit a younger work force in that fashion.

As we see it, that created competitive pressures on those companies that did provide retirement security to cut costs in relation to that.

The tax code added to it. In the '90s, using a variety of devices when the markets were booming, employers simply didn't make the contributions. So when the markets did as they always do, which is after they go up, to come down, then all of a sudden everybody has an unfunded liability. Because of the way pension accounting works — which is, by the way, how it should work — those unfunded liabilities grew after the market rebounded because of the averaging that goes on.

At the core of this was the employer retreat from funding retirement. When some employers retreat from funding retirement, other employers get enormous pressures to retreat from funding retirement. Cute buzzwords like "competitiveness" and so forth are actually about this question, which is: What are we going to do about retirement security in an economy where real incomes are falling? And they are falling both because wages are stagnant and because employerspending on benefits is retreating. …

While the labor movement would love for every employer to be a responsible, stand-up employer around pensions and actually provide a real benefit, the reality is that in a world where everybody else is being irresponsible, it is very hard to be responsible and particularly be responsible and rational, as Ed said earlier.

That's the real dilemma we face today.

It is possible to call this all kinds of cute things like we are being competitive and so forth. What we are actually doing is turning the crank, tightening the screw on working people. And a lot of that screw tightening is not yet visible because in the private sector, people who are retired today are retiring in the benefits world of 1980, the world that used to be. Whereas, increasingly, it is a different world in which total incomes for employees and particularly that portion of total income that has been set aside for retirement has been dramatically cut. We have set in motion market pressures that will worsen that.

We can continue down the road of becoming “more competitive.” But that means we will be a poorer, less fair and ultimately less stable — both socially and economically — society.

Mr. Winkelmann: Let me kind of focus —

Mr. Ferrigno: What a gloomy outlook, Damon.

Mr. Winkelmann: Let me focus on a slightly (different)part of that question. Damonbrought up a couple good observations. He has had a lot of good observations, but one particular one … that we operate in a different world than we did in 1980 ….

What I would like to point out about corporate DB plans today relative to 20 years ago is the financial tools that these plans have to actually manage the risk of the pension plan relative to the entire income statement or the corporate structure; it is just a much different world.

So if you think about things like liability-driven investing, where the plan sponsor or the pension plan can actually minimize the impact of interest rate changes on the liability side and at the same time preserve a return generating portfolio, that is a different world than we had 20 years ago. …

Do corporate DB plans need to think about new tools? Absolutely. I will point them in the LDI direction. That's what we see when we talk to defined benefit plans.

Mr. Silvers: One thing to say about that question, to amplify something Keith said: Employers who are focused on building firm-specific human capital — which GE, for example, is the past master at — are going to be looking for ways to provide real retirement security to those employees. … If you don't do that, the highly skilled employee has to make the decision, which is, “Do I stay here building this firm-specific knowledge, knowing that past a certain point I will not be able to market that firm-specific knowledge in the marketplace; or do I go and try to maximize my personal return?”

You get a very rational outcome there if you can't tell that employee you are going to have security in the future if you make kind of an ultimate bet on our firm.

And those firms that are able to generate real value over time typically tend to encourage employees to make that bet.

Mr. Clifton: Those firms are also giving out restricted stock and stock options for their employees. Even if they are not staying, they have something to take with them.

It is not just they are in some defined benefit and working there for 30 years. There is a lot of fluidness going on in those companies, and the portability is there.

I think the study I saw was three highly specialized private sector companies, GE and … I can't think of the names. They were highly specialized in what they were doing.

That's the argument Keith would make about the defined benefit plans, which is different than the way the rest of the economy works. One reference Keith makes is how many Fortune 500 companies still have a defined benefit plan. That's not where the growth is. They are not saying, “Hey, let's have these future liabilities down the road.”

They can put the same amount of money in (a defined contribution plan) as into their DB plan. You would argue that it is not for the worker. At the same time, they have just contributed the same amount of money and have not one dollar of unfunded liability. That's what these firms are seeing moving forward.

Ms. Webman: Let me just interrupt. We have three minutes left. If everybody wants to take 30 seconds each to make some point, have at it. Keith, you want to start?

Mr. Brainard: I think we know that the proliferation of defined contribution plans as the primary retirement benefit in this country has diminished the nation's retirement security.

I think there are positive lessons to be learned from the public sector pension model.

Mr. Clifton: We believe the shift — not only where we are today with defined contributions, but where we are going once the Pension Protection Act gets fully implemented in 2008 and 2009 and as companies have to make contributions to their defined benefit in 2013, there will be an even larger shift to defined contribution. Workers will have greater retirement income, greater individual control of their own accounts and be able to move freely from job to job. I think the country will be better off because of it.

Mr. Crane: I think our message would be that neither (defined benefit nor defined contribution) is inherently better than the other. It is really a function of plan design to manage the risks, and whatever plan is most appropriate depends on the particular circumstances of the employer, the financial situation and the benefit and the compensation objectives they have for … their employees.

Having said that, neither DB nor DC is working very well right now. We think that both plan types will be evolving to work toward each other in hybrid approaches.

Mr. Winkelmann: I think plan design structures will evolve; they have always evolved. There are some unique advantages to defined benefit plans that it would be nice to see come into defined contribution plans.

Over a longer period, I suspect we will have something where we continue to rely on defined benefit, but we also will have a thriving defined contribution business.

Mr. Ferrigno: The key is that we have a voluntary employer benefit system in this country, and that's resulted in a huge array of plans, particularly in the large plans, custom-designed to serve the needs of their employees. Some of them are DB, some are DC, some are both.

One thing I'm very comfortable with is that the DC system is going to create greater benefits for more people than the status quo that we have today. Part of that clearly is the result of a refinement and evolution of the DC system to, frankly, pick up some of the good attributes of the DB side.

Mr. Silvers: I think DB plans manage both age-related risks and investment-related risks in a way that DC plans do not. DB plans have lower fees and higher investment returns. But nonetheless, DC plans have grown at the expense of DB plans. Why? Because employers can provide a DC plan without actually funding it.

That's an irresponsible choice.

The only reason DC plans are winning this competition is because they are not what they purport to be. They are not actually a retirement security vehicle which the employer is taking any responsibility for.

Ms. Webman: We are done. Thank you.