Retirement might be a time for recreation and relaxation, but the retirement policy world just keeps getting busier -- and more fraught with anxiety.
In the waning days of the 110th Congress, legislators provided critical stopgap relief for defined benefit pension plan sponsors, whose plans' funded status have skewed artificially by unprecedented financial market volatility. By finally clarifying companies' abilities to smooth out asset values over a period of time and offering temporary transition relief to the new Pension Protection Act of 2006 funding rules, the federal government has helped employers mitigate the effects of the economic downturn. Efforts already are afoot with the leaders of the 111th Congress to obtain more comprehensive relief for defined benefit plans, including finer adjustments to the smoothing rules, a delay of the funding level targets and greater choice in funding methods.
Behind this tidal wave of defined benefit pension plan relief, however, is another retirement tsunami. Defined contribution arrangements such as 401(k) plans, tied closely to the stock market, have been hit hard by the recession. And because these sinking plan balances are readily visible to participants, a sense of apprehension has begun to grip these individuals and the lawmakers who represent them.
According to a study by the Employee Benefit Research Institute, average 401(k) balances decreased between 7 percent and 12 percent between January and October 2008. In terms of real dollars, the Center for Retirement Research at Boston College estimates that 401(k) plans and Individual Retirement Accounts absorbed more than $2 trillion in losses. Defined benefit plan losses tallied $1.9 trillion, but those benefits are insured by the Pension Benefit Guaranty Corporation, whereas 401(k) assets, of course, are not.
In an Oct. 22, field hearing in San Francisco, House of Representatives Education and Labor Committee Chairman George Miller (D-Calif.) -- whose committee has jurisdiction over benefits law -- seemed to signal an openness to fundamental reform of the defined contribution plan system.
"We're at a point where this requires a wholesale reexamination of what we didn't do right in the beginning, what we haven't done right 25 years later and what we need for the future ... Maybe we are at a time where fiddling at the margins is not going to serve the American people," Miller said, citing a number of aggressive proposals, including scrapping the 401(k) system in exchange for government-run retirement plans.
Chairman Miller subsequently clarified his position, offering his principles for preserving and strengthening 401(k) and retirement plans. These include bringing young and low-wage workers into the system at a higher rate through automatic enrollment for employers already offering 401(k)s; ensuring that workers have access to reliable independent investment advice; and addressing "excess" fees drawn from workers' accounts.
This last principle is a direct reference to Miller's ongoing crusade against high retirement plan fees. His Fair Disclosure for Retirement Security Act stalled in the 110th Congress, but since the U.S. Department of Labor's proposed regulations were not finalized by the end of the Bush Administration's tenure, he is likely to reopen the issue in 2009.
The employer community will be pursuing its own principles for defined contribution reform, such as promotion of small business sponsorship, regulatory flexibility and predictability for companies and long-term investment education.
Half of the battle might require more effectively demonstrating to the public that defined contribution plans offer great value to employees and the economy. Of course, that message would be easier to convey if only the market would perk up a little.
James A. Klein can be reached via e-mail at info@abcstaff.org.
