Defined contribution plans are under the gun. As account balances plunged last year, 401(k) plans popularly were being referred to as “201(k) plans.” Now Congress is raising questions as to whether these hugely popular plans should be reformed. To address issues of whether and how DC plans should be changed, Pensions & Investments hosted a round-table discussion in New York on May 18. Participants in the discussion, which was moderated by Executive Editor Joel Chernoff, were:
•Dallas Salisbury, CEO of the Employee Benefit Research Institute, Washington;
•Karen Friedman, policy director of the Pension Rights Center, Washington;
•Stephen W. McCaffrey, senior counsel, National Grid U.S., N.Y.;
•David L. Wray, president of the Profit Sharing/401(k) Council of America, Chicago;
•Richard A. Davies, head, product strategy, AllianceBernstein Defined Contribution Investments, New York;
•Michael A. Sasso, principal, Portfolio Evaluations Inc., Warren, N.J.
Joel Chernoff: Karen I'm going to turn to you, particularly with regard to the issue of should there be mandatory provision of retirement benefits — DB, DC, hybrid, what have you?
Karen Friedman: Well, recognizing that this is going to be a controversial issue ... We do think that we should have a system in which employers and employees and the government all contribute.
The government subsidizing low-income earners, you know, that's in a future system. That's for future generations.
But when you look at the fact that the voluntary system — and certainly Dallas' statistics are going to bear this out — but over the last, you know, 25, 30 years, we've still been at the same coverage rates, recognizing that a lot of the coverage has gone from defined benefit plans to defined contribution plans. ... There's no question that 401(k)s can work for a lot of people and we can get into that. But if what we want to do is ensure that people have enough money to be able to retire with adequacy — which I think is what the goal of the retirement system should be — then yeah ... we would say that there should be shared responsibility, and over time there should be a system that has employer, employee and government contributions.
David Wray: The fact is there's already a required employer-provided retirement plan. It's called “Social Security.” It's partially funded by employers. They're responsible for the administrative support of the system. They pay the cost of administering the system. So there's already a mandatory government program.
The question is, should there be an additional one? ... It's very important that American enterprise be globally successful and that employers be able to craft programs that make the best sense for them. We have a mandatory retirement program. I don't think we need another one.
Michael Sasso: I think I would come out on the same side of this issue as David. At some point, you know, we have to take personal responsibility for our own retirement, and that means ... individuals stepping up to the plate and making decisions that might mean a sacrifice — not buying that new plasma TV or whatever the case may be. There are people sacrificing to save for education and their retirement, and for those that choose not to, I think you're going to bear a burden on the people that are taking responsibility for themselves to have to bail out those that chose not to. So I agree wholeheartedly with David.
Richard Davies: It seems like this week everybody wants to know our opinion on things that are mandatory and required. You know, I think in our firm, each of us has sort of individual perspectives — I think mostly political — on whether we think mandatory is a good thing or not. But .... we think there's a lot of potential with the Pension Protection Act for things to work better than they already are.
I think our thought would be to talk to our clients about what is best practice; encourage them to sort of seize the opportunity, make their plans better. But we're watching very carefully what's going on in the United Kingdom; we're involved in some of those discussions over there. But I think for the time being, we would prefer to give the PPA a few more years to act and see if plan sponsors can, on their own, get to where they need to go.
Stephen McCaffrey: You know, from the employer's point, I think the employer has to have the free choice to decide what they want to do. To come back and to mandate the cost and the burden of the pension plan — DB plan or 401(k) plan — I think is a difficult thing to look at the employer and tell the employer he has to do it.
I think the employer has to have the opportunity to collaborate with the employees, and to work with the unions in our case, to make assessments as to what the best benefits are and to also have the employees participate in that process. They have to recognize that there is a responsibility here. They are planning for their future, whenever that retirement date comes. They have an obligation as well to understand it, to make the choices. It's not always easy. There are a lot of burdens out there. There are a lot of issues out there. But I think they all have to work together and collaborate to come to some effective system, with government working in behind there.
You know, there are tax deferrals, there're tax issues out there. There's a lot of things going on here to get it right. And you look at the Australian method and how they do it and mandatory contributions; it seems to be working. Whether in fact it's working, I guess we'll see over time, too. There is employer involvement there and there is employee choice as to whether they want to contribute on top of the employer.
So I think all these things have to be looked at, and we'll see where it ends up.
Dallas Salisbury: Joel, I think the challenge is cost and available income. The Social Security trustees reported last week on the current state of the Social Security program. Clearly it is the absolutely most vital component of income for at least three-quarters of America's retirees. It's the only source for about a third of the nation's retirees.
So the first emphasis to the point made has to be maintaining Social Security. The trustees say that simply to do that for the next 75 years, the payroll tax would need to be increased by another two percentage points. So that ends up saying that the expense of maintaining Social Security going forward is going to be higher for employees and employers.
Secondly, if you look at the debate over supplementation ... the late Robert Paul ... published in the New York Times in 1972 an op-ed piece advocating a mandatory savings system on top of Social Security, he was then the chairman of the Segal Co. ... Many others over the years have advocated some type of mandatory tier. But even when the government was running large budget surpluses, even when the economy was robust, even when demographics were on our side, even when global competition was on our side, the conclusion was always: There's not the ability to afford it competitively and there's not free cash from individuals.
And if you put a final touchstone on that, the primary issue that the current president is focused on is health reform. And if you poll current workers, over 80% of them say that if they have a dollar to spend on something, they will first spend it on health care, not retirement. And when we polled in our Health Confidence Survey the proportion of people who in the prior year reported higher health costs, of those when asked how they paid for it, over 50% paid for it by reducing what they were saving, including in retirement programs.
So given — regrettably, if one looks at it that way — that from a national policy perspective health coverage is a higher priority than retirement savings and frankly, that for individual worker, health coverage, health insurance is a higher priority than retirement savings, then maintaining Social Security will be tough enough. Maintaining Medicare, which has a 4.86% tax gap over that 75-year period, will be even tougher still.
And as a practical matter, it takes you back to how to make what we have work better and work as best as it can, and how to help individuals understand the financial literacy issue. How they can get more out of this system.
But as a practical matter — setting aside whether one thinks mandates are good or bad, whether there should or shouldn't be one — just to be brutally tough about it, the fact is the probability of its happening is about zero and the probability of affording it is about zero.
And so I'd say what we should be getting on with is how do we get individuals and employers to voluntarily do more, because that's what we're likely to be, end quote, “stuck with.”
Mr. Chernoff: Karen, your response?
Ms. Friedman: Well, I agree with everything that Dallas is saying. Certainly we would agree that Social Security has got to be preserved and strengthened; I mean, there's just no question about that. And these are complex issues. We're not pretending that we have easy answers on this. ...
As Dallas was speaking, though, something hit me, which is there's no question that health care is a priority for employees, and, so is, you know, keeping their jobs and paying for education. And one of the problems with the issue that we're all working on is that it's in competition with a lot of immediate needs.
You have one grouping of money, and that money is shrinking for most families right now. They're being hit by the recessionary economy. They're trying to figure out: Do I have a job? What if I lose my job? I need to pay for my health care, the health care of my family, education costs that are soaring. And the last thing on people's plate is saving for retirement.
So one of the issues that I wanted to bring out in response to what I was hearing from you earlier, Richard, and also Stephen, is that people want to save, but in a lot of cases, even if they're automatically enrolled and they do everything right, they may have to take that money out.
You know, leakage is a big problem in 401(k) plans. And I was just talking to 12 or 13 executive directors of non-profit organizations, and most of them have either 403(b) plans or 401(k) plans. They try to do right by their employees. They're putting in an employer match in most cases.
But they're still not leading to adequacy. They're seeing more withdrawals. They're seeing their lower-income workers not putting in as much money or stopping putting in money.
So these are just big issues.
In terms of a mandate, we recognize this is a big issue. We're not talking about something for today. We're talking about something — what makes sense for tomorrow. But we don't see how else to do it, unless we start to say: How can we provide adequacy to future generations? And just in yesterday's Washington Post, Jack Bogle, the former CEO of Vanguard, said that the retirement system in this country is on the brink of catastrophe and we have to do something.
So it's a question of how do we be visionary? How do we think beyond today's box? What do we want for tomorrow? How do we maybe reprioritize some of the tax incentives that we're giving now to have a more efficient system?