Retirement savers have taken it on the chin in the market meltdown, and the risks inherent in self-directed investing are evident to anyone with the nerve to read a 401(k) statement these days.
But the economic crisis also is bringing to light some unforeseen problems associated with these savings plans for employers. Some employee benefits experts think it's time to revisit our entire structure for retirement savings, with a shift back in the direction of traditional pensions as one possible outcome.
Only one-third of all U.S. employers still offer traditional defined benefit (DB) retirement plans--that is, plans with specific cash payouts that are promised to employees at retirement.
DB plans were in the news a few years ago following catastrophic, high profile failures of big plans at companies like United Airlines, U.S. Airways, Bethlehem Steel. These failures led to a series of sweeping reforms under the Pension Protection Act of 2006, which required all plan sponsors to bring their plans to 100 percent funding levels in annual increments.
Although plan sponsors have made major progress toward meeting the new funding goals, the economic crisis is creating new pressure. Market losses have reduced funded status for many plan sponsors. That means some companies would need to plow more cash into their plans in order to comply with the 2006 reforms during a sharp recession, when the funds are needed elsewhere.
A number of big companies with DB plans have been pressing Congress to approve temporary relief from the funding requirements. The House approved a measure this week, and the Senate is expected to act as well.
Meanwhile, the pain associated with steep portfolio declines has some retirement experts calling for a return to DB plans and other options that take investment decision-making out of individuals' hands. But investor pain isn't the only rationale being offered. It turns out the shift away from DB plans may also be creating some new problems for employers and the economy at large.
"Employers with defined contribution plans thought they didn't have to worry about their employees' accounts," said Alan Glickstein, a senior consultant and pensions expert at Watson Wyatt, the benefits consulting firm.
"Now, they're seeing that if the employee's account isn't worth anything, it creates some real issues for management. A market drop like this disrupts the normal workplace flow as people reach the end of their careers, because they can't afford to leave. That creates productivity issues, because they're not happy, and they're sort of in the way of others coming up who would have naturally moved into their spots."
The result is a negative drag on job creation, and companies that wind up spending more on early retirement incentives to move out older workers.
Glickstein thinks the table is set for resurgence in defined benefit plans. "We're seeing the beginnings of it among employers that have never had pension plans before."
Ideas for new savings vehicles also are floating around Washington. One calls for government-sponsored individual savings accounts that would guarantee a certain rate of return and include an annuity feature. Another -- the Automatic IRA -- would create a new system to encourage lower-income workers to save, coupled with very simple investment choices, most likely lifecycle funds geared to the individual's expected retirement age.
One way or another, we're on a course to re-examine the notion that employees are in the driver's seat when it comes to retirement saving.
I've posted more details about the debate at RetirementRevised.com.
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