A Pension Protection Perspective

It’s hard to believe, but the Pension Protection Act of 2006 will be a decade old next month. And it’s probably done more good for the nation’s retirement security than most realize.

The PPA drew its name from the portions targeted at shoring up defined benefit plans (and PBGC funding, I suppose), though at the time I remember most people thinking it was an ironic name, in that it may have been intended to secure the pensions that were already in existence, but might well accelerate the demise of some on the cusp, and in any event was unlikely to help spur any new growth in that area. Some went so far as to call it the Pension Destruction Act.

Indeed, at a recent panel session featuring the perspectives of a number of the Hill staffers who shepherded the at times controversial legislation through its passage, the emphasis was largely on the DB aspects that, though well-intentioned, had been overwhelmed (if not undermined) by the onset of the 2008 financial crisis and the “historically low” interest rate environment that continues to pressure pension funding to this day.

DC Developments

In contrast, the aftermath of the PPA on the defined contribution side has been nothing short of extraordinary. Sure it was all voluntary – the use of carrots like safe harbors for automatic enrollment, rather than the sticks that accompanied the DB provisions. And yet, seemingly overnight, and without a government mandate or regulatory imperative, the decades-old concept of “negative election” (now “rebranded” as automatic enrollment) became part of every credible retirement plan advisor’s toolkit.

Without relying on a mandate to impose its will, nearly overnight the paradigm on automatic enrollment shifted. Sure, it’s still far more common among larger employers than those downstream – and yet, those larger plans are where most participants are. And if the adoption of contribution acceleration has lagged behind automatic enrollment, it is nonetheless far more advanced than it would have been in the absence of the PPA.

For my money, the biggest long-term positive impact of all may have been the rapid expansion of the qualified default investment alternative (QDIA) as the plan default investment option. One need look no further than the millions of dollars in retirement savings that have been channeled into a range of professionally managed asset allocation solutions to appreciate the impact that change has had. All have significantly and positively moved the needle in helping enhance the ultimate financial security of thousands, if not millions, of American workers.

‘Staying’ Power

However, perhaps the most-overlooked, if not underappreciated, aspect of the PPA was that it made permanent the retirement savings incentives enacted under the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), including annual contribution limits for IRAs, Roth 401(k) plans, enhanced portability of retirement benefits, and reduced administrative burdens on plan sponsors. Without that support, all the gains made on those provisions would have fallen back. The PPA also made the Saver’s Credit permanent, as well as resolving legal uncertainty surrounding cash balance plans, and requiring DC plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.

The work is not done, of course. Innovative retirement income offerings continue to be introduced, but can’t seem to find traction, the focus on outcomes (these days generally under the banner of financial wellness) is still nascent, and the challenges of compliance with the DOL’s new fiduciary regulation lie ahead.

With so much progress made – and yet so much yet to be achieved – it may seem naïve in this exceedingly unusual election year to hold out hope that the nation’s legislative bodies could put their heads together and work together as constructively as they did just a decade ago.

But one can (still) hope.

- Nevin E. Adams, JD 

Pension Penchants

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.


• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

London "Bridges"

I was in London for a few days last week, and while it afforded a good opportunity to visit with a number of providers in the European retirement plan market, the primary purpose of my trip was to acknowledge the fund manager and consultant standouts recognized by PLANSPONSOR Europe (which has just celebrated its one-year anniversary).

The luncheon itself was fascinating: As is often the case with such gatherings here, many of the attendees were well-acquainted with each other, a number had common employment histories and, as in the U.S., even those who worked for competing firms at the moment seemed to sense that it could change at any time.

Once we got past the potential impact of the latest Icelandic volcanic ash cloud, the traffic disruptions attendant with President Obama’s visit (which, of course, had been impacted by the latest Icelandic volcanic ash cloud), and the beautiful weather (which, fortunately, was apparently completely unaffected by the latest Icelandic volcanic ash cloud), the discussion turned to “shop.”


The group had some interesting questions for me:

Why are American pensions so heavily invested in stocks?

For the record, this audience apparently felt that a 60/40 allocation to stocks/bonds was the mirror image of a prudent allocation. Of course, every fund is different, and every fund’s allocation is different. I mentioned that I thought that, certainly over the long haul, American pensions have likely benefited more than they have suffered from their exposure to equities. However, regardless of the realities, I know that those who make those decisions believe that. One of the consultants at my table asked a corollary to the first question: why more American pensions haven’t adopted a stronger LDI (liability-driven investment) focus.

To that, I offered three observations: First, I think most American plan sponsors still believe they can, in fact, do “better” by pursuing alpha. Second, while I think most American plan sponsors who have given some thought to LDI are intrigued with the concept, they aren’t quite convinced that the “theory” will work in reality. But finally, I sense that more have embraced the concept than is probably appreciated, albeit in baby steps (purists will, of course, argue that incremental adoption can actually serve to undermine the effectiveness, but…).

Are target-date funds now totally discredited?

The question was actually posed in a way that suggested that, whether they were or not, they should be. That said, my short answer here was, absolutely not; that while 2008 had certainly shaken some, the rebound in the markets seemed to have taken much of the edge from that issue. I noted that while I’ve seen data that suggest some are more interested in something other than a pure “date-based” allocation approach, and that, while there is more discussion around the whole “to versus through” retirement date design, my sense was that most providers hadn’t made significant shifts to their approach (or assumptions), and that few plan sponsors (and no participants) had made any changes in their target-date fund, or allocations to that suite.

In sum, I told this audience that I thought that the market rebound had given our industry a second chance on target-date designs—but that I wasn’t sure anyone was taking advantage of that, sadly.

Why are Americans so opposed to annuities?

I told the audience that I have, on more than one occasion, noted that if we could figure out how we taught participants that annuities were “bad,” and could deploy that to teach them how retirement savings were good, we’d be on to something. That said, I still think that there is a behavioral issue here—one that makes individuals reluctant to hand over a large pot of money today to someone else (particularly a large, faceless institution) so that they can have little pieces of that returned to them over a long period of time. That the annuity ostensibly is expensive, that the individual may lack trust in the institution to which they are expected to hand over a life’s savings, that they can’t access those funds in an emergency—those are also legitimate issues.

All that notwithstanding, I think things could change—and perhaps change dramatically—if American plan sponsors were, in any credible way, encouraged to connect this post-employment investment decision to their workplace retirement plans. The reality today is that most plan sponsors see this as an extension, rather than a reduction, of liability (and with reason, IMHO); there is a palpable sense that product development is still ongoing (and that the best model isn’t yet on the market); and beyond that, we all know that the Labor Department is evaluating alternatives/approaches as well.

In sum, employers have no compelling reason to jump in here, alongside several key indicators that suggest doing so could be expensive and/or premature. Consequently, they are inclined to wait—and until that dynamic changes, it seems unlikely that participants will be overcoming their current reluctance, either.

Lessons Learned

Asked to share insights on “lessons learned” by the American pension system, I noted a couple. First off, I noted that I thought we had never helped workers appreciate the value of a pension, and that, certainly from a financial standpoint, employers had probably never fully appreciated what it would take to fulfill that promise. Moreover, that we were only just beginning to focus on helping workers appreciate what it would take to provide a lifetime of post-retirement income—and that, for some, that message would come too late to be of value. That whereas workers once blithely assumed that the market would “fix” their savings shortfalls, today’s most common unrealistic assumption was that they would simply be able to work longer (this, by the way, is a problem of a different ilk for employers in the UK, who might actually have to provide that employment).

One lesson that I thought we were only recently beginning to “get” was that, if retirement security is going to rely on a defined contribution system—particularly one where “defaults” are driving utilization—you can’t be coy about what it’s going to take. And defaulting people into these programs at contribution levels that don’t even maximize the match, much less come close to what needs to be saved to achieve financial security in retirement—well, that is literally setting people up…to fail.

—Nevin E. Adams, JD

What Lies Ahead - Part 2

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is the second part of our look at the trends that were on our mind this past year—and those just over the horizon.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Where we are: For the very most part, little has changed. Pension funding remains a challenge, with the funding gap seemingly constantly buffeted between the ups and downs of the markets and interest rates, despite the conscientious efforts of most plan sponsors to keep up with ever-tightening funding requirements.


What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector, while in the public sector, financial pressures seem likely to result in a different future solution for newer hires. Sound familiar?

Conflicts of Interests—Advice Regulations

What we said: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Where we are: Well, we now have those regulations—a proposed final version, anyway. For the most part, they seem to have restored and shored the status quo. Not that that’s a bad thing.

What’s ahead: The final proposed regulations will, likely, become the final regulations, at least in the important areas. The big change in advice seems more likely to emerge from a different direction—the recently proposed regulations on the definition of a fiduciary, not so much because it will change the rules on advice, but because the controversy on advice has largely revolved around trying to avoid becoming a fiduciary while offering advice (and getting paid for doing so). And it seems likely that if the proposed fiduciary regulations become law, the advice net some have tried so hard to become ensnared in will, quite simply, be inescapable.

Tax Treatment—Paying Now or Paying Later

Where we are: For years, much of the impetus for the growth in tax-deferred savings plans has been the premise that one’s taxes and/or income would be lower in one’s retirement future. Those prospects no longer seem quite so certain, and new Roth provisions for workplace retirement plans offer today’s retirement savers a different kind of choice. That, coupled with a unique window of opportunity to convert tax-deferred balances (albeit at a price), has some seeing the benefits of tax-deferred saving in a whole new light.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Of course, the impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts (well, it was looming when I wrote this). Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

—Nevin E. Adams, JD

Editor’s Note: If you missed it, you can check out the rest of the list HERE

Grecian 'Formula'

While the markets were in an apparent freefall last week, I could hear former Treasury Secretary Hank Paulsen on the TV in the next room telling (lecturing?) the Financial Crisis Inquiry Commission that the problems that led to the 2008 meltdown could, and should, have been dealt with sooner, and that we could, and should, have moved faster—and with more to stave off the crisis. The criticism then—as it was last week in Europe—was that this was a time to act, not to think; that if we didn’t act—act now, act decisively, and without question—well, the results would be catastrophic.

It is a theme that runs through Paulsen’s recent book, “On the Brink,” as he drags the reader from one impending crisis to another during those fateful weeks of 2008. In Paulsen’s retelling, those who back his “need for speed” are thoughtful and prescient; those who don’t, well, their motivations are generally painted as either blinded to the seriousness of the situation or hopelessly ideological. From the former Goldman Sachs CEO’s perspective, we weren’t bailing out Wall Street, we were saving the very financial system itself (though he was willing to let the politicians claim that they were saving jobs). And perhaps we were, so we set aside our doubts and concerns, gave the experts what they said they needed—and plenty of it—and hoped they knew what they were doing.

Now, in fairness, the financial system did stabilize and the markets did—eventually—return to some semblance of normality. Until ….

Now I, perhaps like many of you, am not yet quite sure what to make of the crisis bubbling in Greece, much less the response of the EU and the International Monetary Fund (IMF), and what that might mean to us. But the chorus—we must act, act now, act decisively, and without question, or else—well, it’s a little too familiar to those of us who thought we had already been there, done that. But, once again, we’re told that if we don’t, things will get worse, much worse—and we’re (again) afraid that’s not an exaggeration.

Déjà View

But make no mistake: There are some clear and disturbing parallels between this “rescue” and the ones that have gone before. Once again you have a sudden infusion of apparent wealth on paper that fueled a borrowing binge that fueled a spending spree that fueled more borrowing, until things reached a point where the system was no longer willing to loan money (despite lucrative fees)—at which point, the whole thing should fall apart. But at that point the outstanding debt is so large that that same system that empowered that situation now claims that failure is not an option. It’s not just that bank, or that automobile company, or that country…it’s all the other things that depend on them….

We’ve seen this before—and more than once—from investment banking to the foreclosed house down the street.

Now, if this was your compulsive gambler of a brother-in-law on the wrong side of another “can’t miss” bet that put him (and perhaps your sister) in trouble with his bookie’s “collection agency,” you’d doubtless bail him out, and insist that he check into rehab (at least the first time). Indeed, that’s what the Greek “austerity plan” is all about: raising the retirement age to 63 (from 61), freezing pay and cancelling year-end bonuses for public-sector workers (no simple thing that, when something north of a third of the population works for the government), hiking the nation’s VAT to 23% from 21%, and cutting retirement pensions by 14% (by some accounts, those pensions currently provide an 80% replacement ratio, adjusted for wage inflation).

This, of course, is also what set off those riots in Greece last week—and the concerns about what that portends for the implementation of this new bailout, and its ability to stem the tide, took a bit of “austerity” out of all of our retirement security last week.

Once again politicians have been led (many willingly and happily) down the primrose path by so-called financial experts—told that there was, after all, a free lunch; lured into a sense of complacency and then, abruptly, told something else. It is a formula that has, again, taken us to what is being painted as a pivotal point, a crisis beyond which a chasm lies. We worry—that they are right, that it won’t be the last, that we’re not doing enough, or that we’re doing too much - again.

And then, somewhere in the dim reaches of consciousness perhaps, we realize that the folks telling us what we absolutely have to do now—without thinking, without questioning, without hesitation—look suspiciously like the folks who got us into this mess in the first place.

—Nevin E. Adams, JD

Promises Premises

It was hard not to be struck this past week by that Pew Center on the States report titled “The Trillion Dollar Gap.”

That title was a reference to the apparent chasm between the potential obligations of the assorted pension and retiree health-care programs of the 50 states, and the money set aside to pay for them (see “States Face $1 Trillion Retirement Benefits Funding Gap”). In some respects, the portrayal was better than it might have been: For one thing, the analysis was based on plan year-ends that predated the Q4 2008 meltdown, and it focused only on state programs, rather than the assortment of local government programs.

On the other hand, it suffered—as many of these reviews do—from a lack of context. It combined the obligations represented by retiree health and pensions—and, while both surely are financial obligations, they are driven by different factors. More importantly, most of the public sector has, until very recently, treated retiree-health obligations as a pay-as-you-go obligation—just as the corporate sector did until the mid-1990s, when accounting rule changes mandated a different approach (one that, in short order, pretty much eviscerated the notion of retiree health-care coverage in that sector, certainly on a prospective basis). Thus, while the obligations are real, it’s hard to escape a certain “gotcha” sense in a report that presents a crisis so soon after the accounting rules have shifted so dramatically1.

“Bad” Timing

The news couldn’t come at a worse time for public pension programs. In recent months we’ve been treated to a series of stories of well-heeled attorneys and politicians effectively “scamming” the system by exchanging a modest amount of service for huge pension payoffs and the publication of $100,000 Pension Club lists in California (with searchable capabilities, no less), alongside the intimations that the insidiously titled “private placement agents” have been lining their pockets with ill-gotten gains from the public treasuries.

This at a time when the perception is that public-sector workers are paid “better”2, that the public sector accounts for most of the jobs “saved and/or created” by stimulus spending—oh, AND that “they” get the kind of pension and post-employment health-care coverage that most private-sector employers long ago eschewed. These concerns will certainly be exacerbated by the Pew study—which, lest we overlook the point, reminds us that “[u]ltimately, taxpayers could face higher taxes or cuts in essential public services.” However, IMHO, what goads the public most about the current situation is a sense that these decisions are taking place with “our” money.

Of course, reports of a “crisis” in underfunded pension plans is hardly an unusual occurrence—indeed, they are as regular as the market’s cycle itself (see “‘Over’ Blown”). Crooks, like Willie Sutton, are inexorably drawn to big piles of money—and promises that can be made today, but not fulfilled until later, are mother’s milk for the political class.

And, while the Pew report acknowledges that “many state officials grasp the depth of the funding challenges for their public sector retirement benefit systems and the need to respond,” it also cautions that “the pressure in an election year to channel money to competing priorities such as education may tempt lawmakers to neglect the problem.”

Still, at a time when it is clear (to me, anyway) that the nation could stand a good shot of fiscal prudence, and while all government expenditures seem fair game for review, it’s worth remembering the following about those public pensions to put those concerns in context:

(1) The median annual (national) pension is less than $20,000. There are abuses, but those are the exception, not the rule. Most aren’t getting rich off these payments.
(2) Most of the funding for those retirement benefits still comes from investment income, not contributions (from taxpayers).
(3) To some extent—and, in some cases, to a great extent—the funding problems presented are the result of changes in accounting rules, not a sign of mismanagement.
(4) Many public-sector workers contribute to those pension plans—putting their savings at risk, as well as their pensions, when the funds are mismanaged.
(5) Many public-sector workers contribute to those public pension plans at rates—and sometimes mandated rates—that are well above the average 401(k) deferral rates in the private sector.

Taxpayers—and that certainly includes public-sector workers—clearly have a stake in the management of these programs and the financial obligations they entail. For the very most part, those responsible for the systems reviewed in the Pew study have been good stewards of what they’ve been given. However, actions have consequences, and the impact of decisions delayed can compound over time. All too often, politicians have intercepted/redirected funds that should have fulfilled those commitments to causes more exigent to their current political or financial realities. As the Pew study reminds us, we must continue to be cognizant of the costs of those obligations. But more importantly, IMHO, we must be more mindful of the promises made—because they can become promises we have to keep.

- Nevin E. Adams, JD


1 Even on the pension side, while acknowledging that, in aggregate, the state systems were 84% funded (and, while that was before the worst of the market slide, it’s still an incredibly good number, IMHO—do YOU have 84% of the value of your mortgage sitting in your bank account?), the report’s authors couldn’t resist reminding us just how much money was represented by that remaining 16% (about $452 billion, in aggregate).

2 Care should be taken in drawing conclusions on pay levels since such “average” comparisons inevitably gloss over the realities of pay differences legitimately based on education, job title, and tenure.