Retirement Savings Policy (eBook)

Michael P. Barry is President of O3 Plan Advisory Services LLC, which provides retirement plan regulatory analysis targeted at plan sponsors and those who provide services to them. Before founding Plan Advisory Services in 1998, Mike was Managing Director at Bankers Trust and, before that, practiced law in Washington D.C. and New York. Mike writes a regular column for PLANSPONSOR Online – "Barry’s Pickings."

Part I: The Defined Benefit Plan Legacy  1 Chapter 1: An Overview of Existing Plans  3 Chapter 2: DB Plan Basics  7 A Formula Benefit  7 Where All the Risk Is Borne by the Sponsor  9 The Three Risks of Retirement Savings  9 Chapter 3: The DB Valuation Challenge  13 The Challenge  13 The “Time Value of Money”  14 Going Concern—The Portfolio Rate of Return Option  17 Chapter 4: The Regulatory Framework—Benefit Insurance, Minimum Funding Rules and Accounting Standards Affecting DB Plan Finance  21 The Pension Benefit Guaranty Corporation  22 The Pension Protection Act of 2006  22 Plan A: Tighten the Minimum Funding Rules  23 Plan B: Relax Minimum Funding Standards and Increase PBGC Premiums  24 The Current Minimum Funding Regime  25 The Current PBGC Premium Regime  26 The Accounting Regime, Very Briefly  27 How DB Liabilities Are Valued for Financial Statement Purposes  28 Chapter 5: The Regulatory Framework—Minimum Standards for Retirement Plan Design and Tax Code Nondiscrimination Rules  31 Minimum Standards  31 Spousal Rights—the Retirement Equity Act of 1984  33 Tax Code Nondiscrimination Rules  34 Tax Code Limits on Benefits, Contributions, and Compensation  34 Chapter 6: Problems with the DB Design  37 Issues with DB Design  37 The Inadequacy of Pre-Retirement Income as an Index of Post-Retirement Needs  37 The Inadequacy of a Flat Retirement Income Target  39 DOI 10.1515/9781547400294-206 The Significance of Post-Retirement Risk  39 The Inadequacy of a Benefit Design Based on a Full Career  40 The DB Benefit Is Significantly Backloaded  40 Significance for Corporate Culture  41 Chapter 7: The Cash Balance Plan Conversion Crisis  43 What Is a Cash Balance Plan?  43 Why a Cash Balance Plan?  45 Why Did These Plans Have a Surplus?  45 Why Does a Funding Surplus Matter?  46 Why Cash Balance Plans Solved This Problem  46 Cash Balance Plan Conversion = A Decrease in Benefits for Older Employees  48 Massive Employee Pushback  49 Chapter 8: The Secular Decline in Interest Rates and the Viability of DB Plans  53 What About the Other Two Sponsor Risks—Investment and Mortality?  54 A Fundamental Lack of Transparency  55 Chapter 9: Getting Out, Slowly  57 The Increased Cost of Plan Termination  57 Getting Out Without Getting Out—The Plan Freeze  58 Taming Liabilities—Liability Driven Investments  58 The LDI Overlay  59 Chapter 10: Managing the DB Legacy—Reducing PBGC Premiums  63 Plan Funding, Briefly  63 PBGC Premiums, At Length  63 Pursuing a Contribution Policy That Reduces Variable-Rate Premiums  67 Variable-Rate Premium Fundamentals  67 Two Broad Strategies  68 Strategies for Maximizing the Value of the Headcount Cap  69 PBGC Premiums and Basic Retirement Policy  71 Chapter 11: The Cash Balance Alternative  73 The PPA Legitimizes the Cash Balance Design  73 Market Cash Balance Plans  74 Chapter 12: Intermezzo—Basic Policy Considerations Part I  75 Two Kinds of Office  75 What Are the Retirement Benefits?  76 The Status of Subsidized Benefits  77 A Legitimate Expectation That the Employer Would Continue the Plan  78 DB Plans, a Verdict  79 Who Pays for Retirement Benefits?  80 Retirement Savings Tax Policy—Two Views  81 Part II: Defined Contribution Plans and the 401(k) Revolution  83 Chapter 13: The Rise of the 401(k)  85 Chapter 14: DC/401(k) Plan Basics  89 How Contributions Are Determined  89 How Assets Are Invested  89 How Benefits Are Paid  90 A Retirement Savings Design that Functions Like Compensation  90 What Happened to the Three Risks?  90 The Structure and Administration of 401(k) Plans  92 Chapter 15: The DC Adequacy Challenge  95 What Is Adequacy?  95 A Subjective Answer to the Adequacy Question  96 Towards an “Adequate” Policy Framework  96 Ambiguities  96 Three Sorts of Answers to the Adequacy Question  97 Adequacy of Investment  101 Payout  104 Chapter 16: Adequate Savings and the Regulatory Framework—Retirement Savings Tax Incentives  105 The Current System  105 Retirement Savings Tax Benefits  106 How Much Are These Tax Benefits Worth?  106 Methodology  107 “Roth” versus Regular Contributions  110 Retirement Savings Tax Incentives, Rothification, and the Budget  111 A Middle-Class Tax Benefit?  112 Does This System Work?  113 Chapter 17: 401(k) Tax Code Nondiscrimination Rules  115 The ADP Test  115 The Dollar Limit on 401(k) Contributions  116 Passing the ADP Test  117 Participant Education  117 Matching Contributions  117 Safe Harbors  118 Defaults  118 Chapter 18: Adequate Investment—The Asset Allocation Challenge  121 Participant Education  122 Default Investments  122 2007 QDIA Rules  123 DOL’s QDIA Regulation  123 QDIA/Target Date Funds as the Preferred Asset Allocation  125 Chapter 19: ERISA Fiduciary Rules  127 Who Is a Fiduciary under ERISA?  128 What Are a Fiduciary’s “Duties”?  128 ERISA Section 404(c)  129 Residual Obligations of Plan Fiduciaries Under 404(c)  129 General Fiduciary Standards  130 Prohibited Transactions  130 Prohibited Transaction Exemptions  131 Chapter 20: The Structure and Administration of 401(k) Plans, Revisited  133 Basic Organization  133 Fiduciary Selection and Monitoring of Plan Service Providers  133 The Structure of 401(k) Plan Fee Arrangements  134 Current Practice  137 Chapter 21: Why Fees?  139 First: Unlike in DB Plans, in 401(k) Plans Fiduciary and Participant Interests Are Not Aligned  139 Second: Fees Have a Significant Effect on Retirement Outcomes  139 Third: Plan Fiduciaries Limit Participant Investment Choices and Negotiate the Deal with Plan Service Providers  140 Academic Work on Fees  140 Chapter 22: 401(k) Plan Fees and Fiduciary Regulation  143 Fee Disclosure  144 Provider-to-Sponsor Disclosure Rules  145 Sponsor-to-Participant Disclosure Rules  146 The Fiduciary Rule, Round 1  146 Round 2  147 The Fiduciary Rule in Brief  148 A New Set of “Impartial Conduct” Standards  150 Regulation of Compensation Policy  150 Disclosures  151 Contract Requirement for Non-ERISA Plans and IRAs  151 Implementation, Criticism, Challenges  151 Fifth Circuit Vacates the Fiduciary Rule  152 Assessing Fee Regulation Efforts  152 Chapter 23: Fiduciary litigation  155 The Problem of Proof  155 “Generic Services”—Recordkeeping  156 Chapter 24: Fiduciary Best Practices and Managing Fiduciary Risk  161 Key Process Elements  161 A Broad Range of Alternatives  163 Chapter 25: An Adequate Payout  169 The 401(k) Payout Challenge  169 Individual Choice vs. the “Right Choice”  176 Chapter 26: Intermezzo—Plan B  183 Continued Work—the Good News  183 The Other Plan B: Moving In with the Kids  185 The Worst Case  186 For the Most Part, a First World Problem  188 Part III: The Future  189 Chapter 27: The Demographic Background  191 The Age-Old Problem of Old Age  191 The Wealth Transfer Paradigm  194 The Socialization of the Paradigm  195 Money versus Time  199 Turning Savings into Investment  199 Chapter 28: The Great Transition  201 The Ratio of Workers to Retirees Is Going to Go Down, Significantly  201 In the Transition from PAYGO to Funding, Someone Will Have to Pay Twice  202 The Transition to the 401(k) System Caught Baby Boomers Mid-Career  204 Chapter 29: Covering the Uncovered  207 How Big Is This Problem?  207 What Sorts of Employers Don’t Provide Plans?  208 What Is Preventing Smaller Employers from Implementing Workplace Retirement Plans?  208 Reducing Administrative Burden and Cost  210 Increasing Incentives  213 And the Gig Economy  215 Chapter 30: The Implications of the Software Revolution for Retirement Savings  219 The Current System  219 The Distributed Ledger Technology Revolution  221 Are There Situations in Which Friction Is a Feature, Not a Bug?  223 Are There Situations in Which Transparency Is a Bug, Not a Feature?  223 Chapter 31: The Role of the Employer  225 What Is in All This for the Employer?  227 Chapter 32: The Bureaucratization of Capital  231 Chapter 33: Coda  233 What is Retirement?  233 The Way Forward  234 Index  237

Don’t be intimidated by its ambitious title, Retirement Savings Policy: Past, Present and Future guides its readers deftly through a history of the U.S retirement system to answer the questions—how did we get here, and how do we move forward? Those who know Mike Barry from his Plansponsor column will recognize that he is a writer gifted in parsing out complex and thorny retirement policy issues, zeroing in on their implications, and offering unique perspectives on how to tackle them. He does not disappoint here, neatly intertwining the tough policy challenges facing the U.S. retirement system within a comprehensive and easy-to-digest primer on that same system. Anyone who wants to understand why 401(k) plans have evolved as they have, and what it might take to get the retirement system on track will want to read this book. The alarm bells that Barry raises about the possible future of not only the U.S. retirement system—but our economy as a whole—if care is not taken in shoring up the $11 trillion defined contribution system is in itself worth the price of admission, and an essential read for those seeking to figure out: what should we do to help future retirees? —Lori Lucas, CFA, President and CEO, Employee Benefit Research Institute