When I think about pension reform, I am reminded of the song from the musical "Hair" about the dawning of the age of Aquarius.
Even though the need for reform was driven by defined benefit plan issues, the new law clearly signals Washington's acceptance of the growing dominance of defined contribution plans as providers of retirement income in America. Congress tackled numerous huge defined contribution plan issues, including company stock (to prevent another Enron Corp.-like debacle), investment advice and automatic enrollment.
That auto enrollment — when an employee has to opt out of participating, rather than opt in — is even included in the new law is stunning to me. Not too many years ago an attempted move to automatic enrollment was soundly pushed back. I recall talking to a 401(k) executive for a fast-food chain who said the company was giving up on its program — then called negative election. The program wasn't working. Here we are, less than a decade later, and automatic enrollment is now part of pension reform.
This acceptance in Washington of the growing dominance of defined contribution plans goes beyond Congress. Last week, the Labor Department proposed, as expected, new regulations on default investment options (where the money goes if the participant doesn't choose specific investment options when he or she is automatically enrolled) that would be protected under a safe harbor.
The acceptable options are balanced funds, retirement age-based lifecycle funds and managed accounts.
I remember when stable value (or some other form of fixed income like money markets) was the default option of choice. Now, no fixed-income vehicles are even proposed.
Even more telling is that one of the acceptable default choices is managed accounts. That means the Labor Department is putting a Good Housekeeping-like seal of approval on a plan participant's 401(k) account being turned over to an outside firm, which will make all of the other investment decisions.
Imagine, this industry has gone through years of trying to educate participants to diversify out of, say, stable value or company stock, and into equities. And now, no less than the Labor Department (by telling plan sponsors and employees it's OK to hand off the money to a third party) is virtually admitting that investment education isn't cutting it.
I don't mean to make light of, or cast aspersions on, managed accounts. Their availability — along with automatic enrollment and other auto features — shows that the retirement industry is trying to ensure that defined contribution plans will provide an adequate income at retirement.
The involvement of Congress and the Labor Department also illustrates a point made by David Wray, president of the Profit Sharing/401(k) Council of America. During a speech last month at the PSCA's conference in Amelia Island, Fla., Mr. Wray said control of defined contribution plans has shifted.
In the past, he said, employees wanted control over their DC plans, while most employers were passive, some little more than payroll pass-through vehicles. Now, Mr. Wray said, employers are in control.
Mr. Wray's speech resonates with me. It explains why employer-provided services such as automatic enrollment and investment advice are so important that Washington had to get involved.
"The nexus point has happened," Mr. Wray said. "Now, the defined contribution system will blossom."
No wonder I keep conjuring up a picture of people from the Labor Department and Congress joining hands, swaying slightly and singing, "This is the dawning of the age of the DC plan, age of the DC plan…"
