The 401(k) retirement saving plan is facing a crisis - in fact, most defined contribution plans are.
That may sound overly dramatic, but remember, the Chinese ideogram for crisis is made up of two symbols: The symbol for danger, and the symbol for opportunity. In that sense, the situation facing defined contribution plans is a crisis.
There is danger that ill-conceived legislation passed in haste in an election year by an ill-informed Congress will permanently damage defined contribution plans, and hence employees' chances of a comfortable standard of living in retirement. But there also is the opportunity to improve retirement security for all employees.
The danger will be realized, and the opportunity for the Enron Corp. collapse to have a beneficial effect on retirement income security will be lost, if Congress rushes to judgment and passes shortsighted, ill-conceived legislation. Bad legislation could kill defined contribution plans, much as bad legislation has almost killed defined benefit plans, and leave employees with no employer-sponsored retirement plans.
The first thing Congress should do is nothing. That is, it should delay legislation until it understands the problem and can develop a comprehensive fix. ERISA, generally considered to have been highly successful pension legislation, was the result of almost a decade of hearings, study and consideration by Congress before it was passed.
The current crisis has been brought to a head by the collapse of Enron, and with it, the destruction of the retirement savings of Enron workers. But the crisis has been quietly building as thousands of retirees, from Lucent Technologies Inc., Xerox Corp. and other companies with large amounts of once high-flying employer stock in their 401(k) plans, saw their retirement income evaporate as the stock prices plunged.
The second step should be the appointment of a new, non-partisan commission to study the current U.S. retirement system, excluding Social Security, and recommend ways to strengthen it. Someone like Dallas L. Salisbury, president & CEO of the Employee Benefit Research Institute, Washington, should head the commission.
Mr. Salisbury is thoroughly knowledgeable about the strengths and weaknesses of defined benefit plans and defined contribution plans. He was involved in the development of ERISA. He has worked in Congress as a staff member, so he knows its ways. He has testified many times to Congress on pension matters, and he has credibility.
The commission should include knowledgeable people from corporations, unions, public employee funds and service providers. It could examine what changes in ERISA might be needed to prevent the possibility of employees' reaching retirement age without a retirement benefit from an employer to supplement Social Security.
It could examine the current tax treatment of defined benefit and defined contribution plans for evidence that tax incentives distort the choice between the two plans. It could examine other legislation that favors one and hampers the other. It could examine recent academic research on the best, most efficient way to provide retirement income security.
Finally, its brief would be to recommend changes that would make the current hybrid defined benefit/defined contribution system better for employees without making the costs unbearable for employers.
Our own view is that a defined contribution plan is better than no plan for employees, but a combination of a floor defined benefit plan and a defined contribution plan is the best structure.
However, Congress, through ill-conceived legislation in the late 1980s and early '90s that restricted asset reversions and the size of pension payments, fatally weakened defined benefit plans. Top executives have lost interest in defined benefit plans, and the plans will be difficult to revive.
Perhaps the proposed commission could recommend ways to revive defined benefit plans as part of hybrid DB/DC plans.