Updated with correction
Sen. Tom Harkin, D-Iowa, proposes to improve pension coverage and retirement security by building a chair. That is, he would add a fourth leg to the shaky proverbial three-legged stool that defines the current retirement system to shore it up.
He calls his idea Universal, Secure and Adaptable Retirement Funds.
But creating a new plan would be a mistake. There is no need for it. What's needed is action to bolster the existing system.
The three-legged stool originally consisted of Social Security, pension plans and individual saving. Social Security's benefit promises remain unchanged, though the trust fund could run short by 2030. The defined benefit pension system is fading away in the private sector, and is severely underfunded in the public sector. The third leg, traditionally the weakest, has been bolstered by 401(k) plans that have provided an employer-sponsored, tax-favored vehicle for private retirement saving.
Strengthening the retirement system means recognizing that, at least in the private sector, defined contribution plans have largely replaced defined benefit plans as one leg of the retirement stool. Additional saving outside of Social Security and the employer-sponsored plan is still needed for a secure retirement, and encouraging that is a key to strengthening retirement security.
Mr. Harkin's proposal appears to signal an end to encouraging revival of the defined benefit system. He calls his USA Retirement Funds a “sort of a middle ground between pensions and 401(k)s,” while Karen Friedman, policy director for the Pension Rights Center, Washington, praises the proposal, saying. “All the elements are the recipe for success.”
The proposal would create privately run, licensed and regulated retirement plans, each overseen by a board of trustees consisting of qualified employee, retiree and employer representatives who would act as fiduciaries. They would be required to act prudently and in the best interests of plan participants. The assets held by each USA Retirement Fund would be pooled and professionally managed.
Under the plan, risk would be shared by participants. If a fund underperformed, all would share in the underperformance, as in a mutual fund. In a 401(k) or other defined contribution plan, each participant bears all the risk of his or her account. But the proposed plan would pay benefits as an annuity based on the investment returns of the funds at the time of retirement.
Employers not offering a retirement plan with automatic enrollment and provisions at least equal to the USA Retirement Fund plans would have to withhold a portion of each employee's pay and forward it, and a minimum matching contribution, to such a plan.
Employers with retirement plans meeting the minimum provisions would not have to participate in the new plans, but could offer them in addition to existing defined benefit and defined contribution plans if they wished.
Mr. Harkin's proposal has its good points. It doesn't call for government contributions and it relieves employers of fiduciary responsibility. It uses professional money managers, and it uses existing payroll withholding systems. Mutual fund companies and trust banks would likely be key players in supporting and managing the plans.
But it introduces a mandatory pension obligation for both employers and employees now without pension plans. Pension provision has always been a benefit provided voluntarily by employers as a way of recruiting and retaining employees.
Small- to midsize employers, which mostly are those that do not offer at least some form of retirement plan, will soon be hit with the costs of adding health insurance as a result of the new federal health-care law. They do not need another mandatory expense imposed upon them, especially at a time of weak economic recovery.
And it adds to the confusing alphabet soup of pension plans: DB, DC, 401(k), 403(b), IRA, SEP, etc.
Instead of adding another retirement plan with its own set of tax incentives, Mr. Harkin should seek to make existing defined benefit and defined contribution plans more attractive, by easing the burdens on defined benefit plan sponsors, and by raising the contribution limits of existing defined contribution plans.
At the very least, he should be taking steps to protect the current tax benefits the non-federal retirement systems enjoy. These may well come under attack as the government examines tax loopholes and preferences in its efforts to enhance revenues to balance the federal budget.
Mr. Harkin hasn't introduced legislation for his proposal, or come up with the economic impact on key constituents, including employers, participants and the federal government.
His proposal isn't ready for prime time, perhaps because Washington has been busy with the election campaigning.
A recent survey of Pensions & Investments' online audience found 73% of the 529 respondents support the proposal, a strong showing of support that is perhaps a sign pensions are getting the attention they deserve. However, these respondents most likely already sponsor retirement plans and therefore would not be affected.
But it isn't the right proposal.