Congress Begins Review of 401(k)s
Congressional Review of 401(k)s Begins | Human Resource Executive Online
Although retirement-plan design is probably not at the top of any company's agenda in these tumultuous times, delaying such consideration may not be an option for long. With trillions being lost and Congress preparing for hearings, HR leaders may need to start paying more attention to this issue.
By Dallas Salisbury
January was a month filled with hope that the stock market would record a gain and allow everyone to "believe" that 2009 would follow history and be an "up year".
That would have allowed witnesses at upcoming Congressional hearings to "predict" that 401(k) account balances would gain back some of their 2007 and 2008 losses and to argue against any significant changes in public policy.
But, as we now know, the markets did not cooperate.
Yet, even as the markets have continued to bounce and more employers have announced that they would suspend matches, Congressional support for the changes that have been given widespread media coverage to "protect" participants has not developed.
For two weeks it appeared that Rep. George Miller, D-Calif., favored radical change, but he quickly issued "clarifying" statements and editorial page opinion columns in support of 401(k) plans largely as we know them now: voluntary sponsorship with defaults and opt-outs.
On Feb. 3, a panel of researchers met at the Urban Institute in Washington to discuss the topic,
"Frozen Pensions and Falling Stocks: What Will Happen to Retirees' Incomes?"
A number of points were made that should be of interest to human resource executives -- and are likely to arise at upcoming Congressional hearings:
* A paper from Mauricio Soto of the Urban Institute reported that between Sept. 30, 2007 and the end of January 2009, the stock market lost 43 percent of its value, or nearly $10 trillion. Retirement accounts lost about 31 percent of their value, or nearly $2.7 trillion during that same period.
* Panelist Jack VanDerhei of the Employee Benefit Research Institute (the organization I lead) said that longer-tenure older workers were the hardest hit in terms of lost account values and reported how long it would take them to get back to where they started.
He noted that getting back to even is a function of both new contributions and future investment return.
"Looking at those with 20 to 29 years of tenure at the median, a zero percent equity return would require just over two years to get back to even. A 5-percent positive equity return would bring that down to below two years, while a negative 5-percent equity return would push it out to 3.5 years," he said.
* Panelist Eric Toder of the Urban Institute brought both good and bad news. His bad news was that the ongoing pattern of freezing defined-benefit pensions and replacing such pensions with defined-contribution plans produced far more losers than winners, with 48 percent in the top quintile losing, as only 12 percent gained.
His good news was that the ability of those still working to put new savings into the equity market at current levels held the prospect of their having far more money 10 and 20 years out than if the market had not declined.
* Panelist Peter Brady of the Investment Company Institute pointed out that, since the percentage of aggregate income of individuals 65 and older no longer working came primarily from Social Security and public assistance, in both 1979 and 2008, and that only 37.8 percent came from private pensions and asset income in 1979, and 32.1 percent in 2008, policy makers should not overreact to the effect of either the decline of private defined-benefit pensions or the effect of market declines on individual-account retirement plans.
* Panelist Janet McCubbin of AARP noted that Social Security benefits are likely to be reduced in the future for some and that a minimum benefit be introduced to aid the lowest-income retirees.
She also noted that SSA benefit reductions make it important that individual-account plans do a better job. She advocated legislation to place automatic IRAs at the workplace, establishment of a universal 401(k) program, promotion of hybrid defined-benefit plans, elimination of pension integration with SSA, required survivor protections in defined-contribution plans, promotion of annuitization at retirement, and state-assisted savings plans.
Human resource executives have many issues on their agendas as they deal with the current economy. Retirement-plan design is likely not near the top of that agenda, but Congress may cause it to move higher in the months ahead.
The Senate Aging Committee and the House Committee on Education and Labor are probably going to be at the head of the line calling on employers to pay attention.
Dallas Salisbury, an expert on economic-security issues, is president and CEO of the nonpartisan
Employee Benefit Research Institute
in Washington.
February 16, 2009 Copyright 2009© LRP Publications
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