BNA Pension and Benefits Blog

Thanksgiving Feast or Famine? - DOL Withdraws its Investment-Advice Regulation

The DOL has withdrawn its investment-advice regulation, culminating a process that began with a firestorm of objection regarding the DOL's attempt to implement the PPA's new investment-advice exemptions. The PPA's exemptions were controversial when passed, and became more controversial when the Department interpreted certain fee-leveling requirements in a manner that was perceived to be narrow. Then, in the final regulations, the Department added a new administrative exemption that narrowed the requirements still further, touching off congressional accusations that questioned the regulatory process itself.

The shrillness of some of the rhetoric was, to me (see my prior post on this), unfortunate, as efforts over a long and arduous regulatory process by dedicated public officials became characterized and impugned as special-interest gifts bestowed on the eve of a change in administrations. In an interesting rhetorical twist, which had the intended public-relations consequences, what I would have more neutrally called "inside" advice came to be referred to pejoratively as "conflicted" advice.

With the change in administrations, those upset with the regulations became empowered, and their influence within the DOL increased dramatically, as one might expect. The Department's actions now indicate that there will be some narrowing of the rules, but it remains to be seen whether a reproprosed rule will so narrowly interpret the statutory exemption that it will essentially marginialize it altogether. That could happen if, for example, the level-fee requirements were to be interpreted so as to require structures that are so sanitized that the structures don't involve self-dealing at all, in which case no exemption would be necessary. (I would expect the prior work done regarding the computer-model exemption to be relatively less controversial, and would be surprised if the Department would propose dramatically reversing that aspect of the regulations; we'll have to wait and see.)

To me, what amounts to a regulatory repeal of the statutory exemption would be unfortunate. The PPA struck a legislative balance given the legitimate and crying need that participants have for this advice, on the one hand, and conflicts that may arise, on the other. The Department's new proposals will hopefully not, by fiat, effectively repeal the fee-leveling exemption.

I think it is critically important that a wide range of professional advice be made available to 401(k) participants, who are in desperate need of professional advice. I think that one of the great deficiencies in current retirement policy is that, with the move to a focus on participant-directed defined contribution plans, which is the result of a confluence of events over time, what may be among the most important of investment assets - retirement assets - are left under the management of those (like me) often utterly untrained in how to invest those assets.

The PPA struck a balance that would have facilitated the provision of additional types of advice. Was the balance struck in the statute the precisely correct one? That, of course, is always open to discussion, but Congress did act. There now are proposals in Congress that would recut the rules, in effect eschewing any effort to balance the competing considerations and deciding that no conflict is tolerable, and the approach taken in those proposals is extreme. I think it would be unfortunate if Congress were altogether to take away from employers the ability to arrange for reasonably crafted inside advice delivered with proper safeguards (what I've called "conflict-safe," as opposed to "conflict-free," advice). In any event, though, the Department should credibly implement the rules that have passed, unless and until Congress reverses those rules.

And to what point does that bring us? At a minimum, I would expect the DOL to cut back or reverse the administrative exemption that goes beyond the statute; but we'll have to see how much farther they go in trying to narrow the statutory rules that are already there. At the end of the day, wherever it all lands, I hope that we wind up with a system that permits participants and beneficiaries to have a reasonable shot at accessing a wide range of professional advice to help them through the investment of their retirement nest eggs.

How to Restart the Pension System By Giving Executives a Stake In It

In 1973, just before ERISA, we worried about individual workers losing their defined benefits because of insufficient funding, no plan termination guarantees, and little or no vesting.  Most of us did not worry about the whole system falling apart.   There were just too many disappointed expectations under the previous system.

Once we found a way to stabilize the security of the defined benefit (DB) system, however, we set about shredding a central feature of the DB system’s growth.  How?  We just about wiped out the senior executive’s primary stake in the qualified plan system.  We severely limited creditable “compensation” (IRC 401(a)(17)), while also setting a low maximum level of defined benefits under qualified plans (415), and then we piled on limit after limit (“QSLOB”s, “top heavy” rules, etc. etc. etc.). 

Originally, we relied upon the non-discrimination rules (IRC 401(a)(4) etc.) to achieve benefits for the “rank and file” by riding on the coat-tails of the executives’ interest in their own retirement benefits.  But what if executives lost (or severely diminished) their own interest – their own “stake” – in their own benefits under qualified plans? 

In fact, little by little, senior executives saw what was originally not so plain to see: If a highly paid senior executive wants to earn a pension commensurate with his/her total level of earnings, it must be done on a non-qualified basis.  And it wasn’t just the CEO and CFO who lost interest in qualified DB plans.  Perhaps more importantly, it was the Senior Vice President (SVP) for HR and/or Benefits (the source from which all blessings flow?).  The “clients” who oversaw all pension plan design discussions no longer saw themselves as having a primary personal pension stake in that qualified plan design.  And when the “clients” lost interest in qualified DB plans, their lawyers, actuaries, and consultants got the message(s): 401(k) plans, originally designed to “supplement” DB plans, began to supplant them instead; traditional DB plans converted into cash balance versions; other DB plans froze; other DB plans terminated.   And the ball game is just about over. 

In the meantime, a huge new plan design game mushroomed: Non-Qualified Deferred Compensation.  And DB plans, left behind, became moribund.  Why?  For many reasons.  We tend to blame various versions of “the perfect storm” – a combination of stock market decline and interest rate decline, large and sudden unexpected increases in required contributions to DB plans, fouling up corporate budgets and expected cash flow at just the wrong time.  But that was not inevitable.  It was mainly an inevitable result of using unreasonable actuarial assumptions (earnings assumptions too high, and other manipulations), which of course lead inevitably to a day of reckoning.  The day of reckoning always needs a villain – and the obvious  villain (in most cases wrongly accused!) was the DB plan itself, and not the actuarial games that exacerbated the funding crisis. 

In any event, the result was abandonment of the DB system, followed by much hand-wringing, sturm und drang, and insistence that we need to find a “replacement” for lost retirement security.

The most familiar “fix” currently being touted is a mandate – force employers, or require employees, to do something (mandatory IRAs, etc.), as if that would replace what we have lost.  It won’t be sufficient, it won’t work, and it may not be necessary.  

If we want the private system to work as it should, the people who design, implement and run the employer’s benefit plans must be given a major stake (their own retirements) in the employer-sponsored system.   Do that, and they will solve the problem for their employees.  Don’t do that, and they will not.

How can senior executives be given a sufficient personal stake in qualified DB pension plans to induce a resuscitation of the DB system?  It would love to be able to say “it’s simple.”  At least it’s possible.  And here are a few steps to get it started.

1.  Triple the maximum DB Plan benefit.

2.  Triple the maximum amount of creditable compensation under 401(a)(17).

3.  Search-and-find-and-adjust all other statutory and regulatory components of the barricade blocking sufficient executive DB benefits under qualified plans.

4.  Redesign the interface between qualified and non-qualified plans so as to reduce the attractiveness of non-qualified plans when compared to the expanded qualified DB plans.

5.  Amend the non-discrimination rules to assure that the lowest-compensated employees are not the “losers” as a result of using an unreasonably-low percentage-of-compensation DB benefit formula.  (In other words, use a “safe harbor” low-comp approach, when permitting the new expanded hi-comp limits).

Can we “afford” it?  A fair question, but not quite the right question.  We bemoan the “loss” of the old world of DB plans.  Suppose those plans had not frozen or terminated– what would have been the “cost” (tax revenue loss)?  Isn’t this the same amount as the assumed cost of restoring the system?  If so, then the “cost” is just the same as the “cost” of not having lost the old DB system.  If we’re serious about restoring retirement security, then that’s the inherent cost, as it always has been.  And we had better be prepared to pay it, because we’ll end up paying it (welfare for the elderly) one way or the other.

Frank Cummings
July 2009

Automakers' Insolvency Opens All the Benefit Cutback Targets and Problems

    The insolvency (whether or not in Chapter 11 reorganization) of the three automakers brings “legacy costs” back to the center stage of ERISA cutback negotiation and litigation. 

    The automakers have already put themselves on the cutting edge of many of these issues outside of bankruptcy.   

    They have litigated retirees’ medical benefit cutbacks, arguing that retirees were not vested (Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998)). 

    They have negotiated VEBAs with the UAW and then sought to bind the retirees by class action settlements and court approval after a fairness hearing. International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007)   Still, further developments are inevitable, particularly in light of the recent VEBA history. 

    Some of the key “legacy cost” questions are these:

        1.  The first question, logically, is this: Are the retirees’ medical benefits “vested”?   The “vesting” of retiree medical benefits is certainly possible, and it depends on the words of the plan, the magic of language such as “for your lifetime,” the admissibility of parole evidence to clarify “ambiguities” in the plan and SPD, and so on. UAW v. Yard-Man, Inc., 716 F.2d 1476, 4 Employee Benefits Cases 2108 (6th Cir. 1983), cert. denied, 465 U.S. 1007 (1984); Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998); Yolton v. El Paso Tennessee Pipeline Co., 435 F.3d 571, 36 Employee Benefits Cases 2217 (6th Cir. 2006); Bland v. Fiatallis, 401 F.3d 779, 34 Employee Benefits Cases 1875 (7th Cir. 2005); Doubtless the rules need clarification, and the various circuits’ positions need reconciliation.

        2. If the case reaches the bankruptcy court, does “vesting” really matter?  The answer ought to be obvious, but if you read the actual language of the Bankruptcy Code (11 U.S.C. section 1114), the statute on its face never mentions vesting, instead requiring continuation of a “program” of  “retiree benefits” that was “maintained” before the bankruptcy filing (Sec. 1114(a)).

        3. If a union makes a cutback bargain, how does the union get to "represent" its retirees, when unions legally only represent actives? Allied Chem. & Alkali Workers v. Pittsburgh Plate Glass Co., 404 U.S. 157, 1 Employee Benefits Cases 1019 (1971).  A retirees’ medical benefit program would not be a mandatory bargaining subject under the NLRA if the bargaining issue did not affect any currently active employee. But that may be a non-problem because the bargaining topic frequently includes benefits for current employees, payable when they retire (which is certainly a mandatory bargaining subject). And in any event, there is an overriding reality in distress situations – the union has at least a little “muscle,” and the retirees ordinarily do not.

        4. In any event, how do you bind the retirees?  Typically, the court certifies a group of retirees as a Rule 23 class action representative.  International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007)

        5. What standard is used by the court to decide whether to force retirees to give up their claim against the employer in exchange for reliance on the VEBA? See the GM and Ford rulings. And while the Ford/GM standards are not (yet) actually under the Chapter 11 cutback devices (sections 1113 and 1114), the VEBA settlements previously approved by the district court were based on findings that the VEBA deals were less severe than the cutbacks the retirees might have lost in bankruptcy (497 F.2d at 628).  And yet only recently GM has backed out of its VEBA funding commitment.

        6.  How can you VEBA-ize a solution to legacy costs, when a VEBA can only accumulate one year’s worth of benefit costs?  A “garden variety” VEBA is allowed only a very limited pre-funding accumulation, but a collectively bargained VEBA is not so restricted. IRC §§ 419(c), 419A(f)(5)(A), 501(c)(9).

        7. What if the employer buys this deal in exchange for payments into the VEBA, and then the employer defaults or goes bankrupt before full payment?

        8. Is there some hidden logic in this -- an assumption that the VEBA only has to remain solvent for a few years, and then National Health will arrive in all its glory and bail out everyone?   How many years?  And in the meantime, what sort of “booking” treatment is allowed, in such situations, for financial statements of public corporations?

        9. Do the rules really change after a filing in Chapter 11?  Chapter 11 bankruptcy reorganization has its own collective bargaining provisions, which apply to changes in labor agreements (11 USC 1113) and even to retirees medical benefits (11 USC 1114). This special “last offer” bargaining lowers but does not ordinarily wipe out retirees medical benefits, because the court’s approval of the “bargain” depends upon a finding that the cut-back is the least severe change necessary to save the debtor.

        10.  And then there is the whole array of issues arising under the defined benefit pension plans.  Termination of these plans (“distress” or involuntary termination under ERISA 4041(c) or 4042), inevitably generates losses by surprise.  Employees and retirees are often surprised that they are not eligible for funded benefit levels as high as they expected, because of the calculation of “PC3" priority benefits under ERISA 4044(a)(3)), particularly after the funding level of the terminated plan is recalculated by the PBGC.  And even the guaranteed benefit level may not be as high as anticipated, given the obscure rules for ERISA Title IV guaranteed benefit calculations.  And the liability of the plan debtor/employer/sponsor may be higher than expected, given PBGC’s determination to argue and re-argue questions concerning their priorities in bankruptcy, even though PBGC seemingly has lost these arguments repeatedly.

    The core problems, however, concern conflicts of interest – conflicts by the union, by the employer, and by the PBGC – and these conflicts abound. 

    The union’s conflict:  It does seem clear that the UAW – now as in the past, all the way back to the seminal Studebaker case – will inevitably be faced with a terrible Hobson’s choice:  Save jobs by lowering costs (“selling out” the retirees)? Or fighting tenaciously for protection of retirees, and risk destruction of the enterprise?  Section 1114(c) of the Bankruptcy Code recognizes the conflict of interest of the incumbent union, but presumes that the conflict may be avoided or ignored.  And yet, inevitably, it is still there.

    The employer’s conflict: ERISA by its express terms makes the employer a presumptive fiduciary – even a named fiduciary – and plan administrator.  ERISA §§ 3(16)(A)(ii), 402(a)(2)(A).  The existence of the conflict is assumed by the statute, but the employer, even with a conflict, is prohibited from acting on the conflict (wearing “two hats” but not at the same time).  And in chapter 11, the employer has three hats – employer, fiduciary for the plan, and fiduciary for the creditors.  Again, the conflict is inherent in the situation.  In the ordinary course, the situation is manageable.  But the puzzles described above are not ordinary.

    And the PBGC’s conflict: The PBGC was invented to protect employees and retirees.  In recent years (decades?), however, the PBGC has often seemed more interested in protecting its balance sheet than its natural constituents.

    We shall see.

Frank Cummings

Election and Retirement Security

The election is now only days away and will occur within the context of a financial markets meltdown. The effect on retirement security has been significant. Public policy considerations must be addressed asap.

DB plan asset values have tanked and funding requirements for 2009 and thereafter will undoubtedly increase substantially. (Partial offsetting relief is experienced because of higher corporate bond rates.) Without some form of pension funding relief, more plan freezes can be expected. We could see some as early as 11/15/08 204(h) notices for 1/1/09 freezes. Several organizations have proposed various relief measures. An alternative simple proposal would be a measure that limited mandatory 2009 contributions to the amount of 2008 contributions with an accompanying rule that 2008 could be ignored for at risk plan status, etc. Hopefully, Congress could address this quickly during the upcoming lameduck session.

More long term, we need to evaluate how we can make 401(k) plans better vehicles for providing retirement security. Several suggestions (some of which have been conceptually addressed by others, e.g. Teresa Ghilarducci, in other conceptual frameworks) include:

1. Improve the market and regulatory rules regarding annuities- deferred annuities purchased throughout one's career, terminal annuities acquired at retirement, and longevity annuities that would commence in at some advanced age (e.g. 80). The first would allow for cost averaging of annuity purchases, the second (a market for which is slowly developing now) may need to be mandated for a portion of terminal account balance (if participant didn't acquire deferred annuities during active participation), and the third would guarantee a level of income for those that survive and allow the rest of one's account to be payable over a fixed period from date of retirement to longevity annuity starting date. Lump sum distributions would be limited to a specified percentage of account balance.
2. Require mandatory participation in some retirement vehicle. If an employee doesn't have a db plan, then they must participate in a 401(k) or similar vehicle. For those employers that don't want to sponsor, individuals should be able to participate in free-standing plans similar to 401(k) sponsored by current (and other) 401(k) vendors.
3. The investment responsibility should be moved from the participants to the sponsor or toher fiduciaries. Plans would only provide balanced, target date funds that employees participated in during their working lives and until distribution or annuitization. Protections for sponsors or vendors similar to 404(c) should apply as long as the manager of the target date funds was prudently selected and monitored.
4. A portion of 401(k) or other retirement plan distributions should be able to be used for retiree health costs on a pre-tax or other tax effective basis (e.g. very low tax rate).
5. For immediate assistance with current financial crisis and longer term thereafter, 10% excise tax on distributions for true financial hardships should be eliminated. It makes no sense to apply this tax to those suffering a financial emergency/hardship.

Looking Back, Looking Forward

While December is when most of us look back on the year coming to end and make plans and resolutions for the year about to begin, September is another one of those times for me. After all, it’s an important month in its own right—the start of the academic year (even if classes now begin in August), the official beginning of the race in election years like this one, the unofficial end of summer with Labor Day and lest we forget, the anniversary of ERISA’s passage.

September also brings a couple of personal anniversaries: Labor Day marks the beginning of another year as a self-described ERISA “geek” and in the middle of month, my third year in Washington at the AFL-CIO begins.

My anniversary musings this year, as you might expect, were influenced by the work of the past year and the significance of the election to come in November

Health care reform is clearly important with many polls ranking it, together with the economy, among the top issues of concern. But, one issue that’s talked about less outside the benefits community is just as critical--the pending retirement security crisis.

Here are just a few facts to consider, most of which are familiar to benefits professionals. Pension coverage remains at about 50 percent of the workforce. The shift from defined benefit to defined contribution plans, primarily 401(k) plans, is leading to a decline in pension wealth. And, according to the latest Retirement Confidence Survey from the Employee Benefit Research Institute, only 18 percent of workers are very confident about having sufficient money for retirement. The 9 point drop from the 2007 survey was the biggest one-year drop in the survey’s history. One bright spot is the continued vibrancy of defined benefit plans in the public sector.

So far, the conventional wisdom seems to be that individual account defined contribution plans or individual retirement accounts (IRAs) are the best way for workers to provide for their retirement. But, is this really true? Should we consider different approaches to defined benefit coverage?

When I was introduced to ERISA more than 25 years ago, there was talk of setting a national retirement income policy. Is it finally time for all of us to have that conversation?

A New Retirement Security Proposal Meets With a Yawn?

            Several weeks ago, the ERISA Industry Committee (ERIC) published a new proposal for retirement savings in the United States billed as a “New Benefit Platform for Life Security.” 

            As the first prong, the proposal suggests that there be three types of retirement savings: (1) a defined benefit plan, called a “Guaranteed Benefit Plan,” (2) a defined contribution plan, called a “Retirement Savings Plan” and (3) a short-term security account.  These plans could be offered independently or in combination with one another to provide additional retirement resources beyond Social Security.

            The Program focuses on providing sufficient incentives to maintain and expand employer participation and encourage individuals to contribute to their own retirement security. If implemented, the program would significantly simplify the current system, ideally make it more equitable to employers and employees and expand participation.  The program contains several supplementary initiatives including educational financial planning services, a regulatory program to provide full disclosure of fees and expenses and pre-established limits on both before and after tax contributions for each of the three types of plans.

            While the New Benefit Platform for Life Security has much to recommend it, very little has been written about it and few in the benefits practitioner community seem to have noticed it.

            You can follow the links here to see a copy of the Core Structure for Life Security Plan (the “Summary”) and a longer version that spells out some of the details (see pages 13-17 of report, found in pages 23-27 of this document).

            What do you think of this proposal?  Might it be improved by requiring that employers of a certain size actually be required to offer all three types of plans in combination?

Would You Buy an Annuity for Your Mother?

Much has been made of the fact that employers are increasingly turning to 401(k) plans rather than defined benefit plans. Employers are implementing a number of strategies to help employees achieve retirement security in this brave new world. Most of these strategies, such as automatic enrollment and automatic increases in participant deferrals, focus on the asset accumulation phase. At the BNA conference earlier this year on Redesigning Pension Plans and Executive Compensation, Henry Eickelberg of General Dynamics talked about an innovative program that a number of large employers negotiated to help their employees buy annuities at reasonable prices.

The employer group isn't offering the annuities in their qualified plans but instead is making them available to employees for both plan rollovers and direct investment. The annuities include both fixed annuities, with and without inflation protection, and variable annuities. The group negotiated low commissions (.5% on the fixed annuity product). The good news is that these annuities are not limited to the employer group but are available to the public so other employers can bring them to the attention of their employees and financial planners can consider them for their clients. You can check them out at on the website for the Elm Income Group.

Years ago, before the Department of Labor issued its guidance on purchasing the safest available annuity for participants in terminating plans, Interpretive Bulletin 95-1, I advised a client that the standard was "Would you purchase an annity for your mother (not your mother-in-law) from this carrier." So I was intrigued years later by an article that Ron Gebhardstbauer wrote for the Women's Institute on a Secure Retirement (WISER) on the advice he gave his mother at age 77. She began receiving the required minimum required distributions at age 70 1/2 and he determined  that she would do better with an annuity than with the annual payouts, with the added advantage that she wouldn't see her annual payouts decrease as she got older. (Ron is the Senior Pension Fellow for the American Academy of Actuaries and the former Chief Actuary for the PBGC, so he can readiy figure these things out, unlike the rest of us.) I recently checked with Ron and his mother is still enjoying her annuity in her mid-80s.

You may be able to find a better deal through your own plan. I compared the payout on a single-life annuity for a male age 70 from Elm for someone who has $100,000 to invest to the same annuity offered by the federal Thrift Savings Plan (TSP), the 401(k) plan for federal employees. The annual payout under the Elm annuity was slightly less ($814 compared with $834 from TSP). Similar results for a female beginning payouts at age 60 ($605 from TSP versus $664 from Elm). However, most employers don't offer annuities to their DC plan participants and, even if they do, they may not have rates as competitive as TSP. The Elm annuities are definitely worth checking out. And kudos to the employer group that made an effort to bargain these good rates for their employees.

I'd be interested in hearing about any other sources for annuities that offer better rates. With the increasing elimination and freezing of defined benefit plans, employees will need to engage in self-help on the payout side of the 401(k) ledger just as they have to do on the investment side.

Insuring the employee’s risk

Insuring the employee’s risk

The benefit gambit currently in vogue is a new kind of risk-transfer.  Instead of having the employer assume the employee’s long term risk (by defined benefit pensions, and by comprehensive health benefits), the name of the game now seems to be: transfer the risk to the employee.  How?  First, by giving the employee a defined contribution 401(k) and letting the employee take the risk that it might not be sufficient for retirement; and second, by designing a health benefit plan where large components of the risk of health costs are transferred back to the employee, and giving the employee a Health Savings Account that may or may not be sufficient to cover that risk.  And so on.

What about insurance of these risks?  Where are the new insurance products (protection for employee’s medical “HSA-Gap”? Employees’ 401(k) inflation protection?) designed to absorb and mutualize the employees’ cost of these risks?  Why not provide that kind of insurance to employees, but through employers, on a group basis purchasable by employees through their own § 125 cafeteria?

This is a market in need of new insurance products.  The insurers have a well-established but perhaps obsolete habit of “selling” group products primarily to employers, designed to save money for employers and reduce the employer’s risk.  What new safe harbors or other law changes are needed to facilitate an insurance industry effort to reduce employees’ risks?  What new “suitability” issues are involved? Surely the need is there, and the need should make the market.

Real Retirement Security – What Would it Look Like?

Real Retirement Security – What Would it Look Like?

    The massive PPA-2006 did a little to protect the security of one government agency.  But PPA  did almost nothing to protect the retirement security of those who need it the most.  These are the people who are unlikely to accumulate adequate retirement security without employer-sponsored or government-sponsored assistance – the very same middle income employees (Studebaker’s “losers”) who needed it the most 40 years ago just before ERISA’s enactment  (the “target group”).  Studebaker’s “losers” would be adequately protected by the PBGC under today’s law IF, as they did then, they had an adequate DB plan.  But they’d still be living in a dream world if, today, they thought their employer would have a DB plan much longer.

Consider the current status quo:

    DB Plans are freezing or dying or both.

    Without DB Plans, “early retirement” is less and less feasible.

    “Cash balance” hybrid plans?  Perhaps a useful way for an employer to capture an actuarial surplus, but hardly a substitute for the good old fashioned lifetime annuity.  Indeed, hardly even a favorable substitute for a garden variety DC plan or 401(k).

    DC Plans are replacing DB Plans, but hardly anyone thinks that a 401(k) plan by itself will provide retirement security for the middle class.  Why not?  Just “follow the money” – cashout after cashout to pay for tuition, mortgage debt, credit card debt, and so on.

    Employer-sponsored medical benefits?  The tilt away from sufficient full coverage is becoming a landslide,

    Employer-sponsored “lifetime” (vested) retirees’ medical benefits?  Forget it.

    Of course there’s Social Security, but its index is likely to be cut back. 

    And in the meantime, Medicare, or what’s left of it, will itself require greater and greater employee co–payments and premiums to control a seemingly-uncontrollable funding shortfall.  Where do the increased premiums come from?  They’re deducted from Social Security, which makes both of them less and less sufficient.

If there a “fix”?  What would it look like?

    On the pension side: How about “locking-in”?  – No cashouts.  No withdrawals before retirement age.  And all benefits in annuity form.  Objections?  Employees won’t contribute?  But then what’s the message – that employees won’t use 401(k)’s except for short-term savings?  Then why have a tax shelter for that in the first place? – it’s got nothing to do with retirement security.

    On the health benefit side: Well, just keep rearranging the desk chairs on the currently sinking Titanic, but don’t delude yourself into thinking it’s not sinking.  National Health is on the way.  You don’t like it?  Nobody does.  It’s not great.  It’s just inevitable.  (As a current beneficiary of Medicare, I can tell you that my “single payer” system is a lot better than most youngsters’ “managed care” coverage).  I don’t love it.  But I like it a lot better than what I had before age 65.

    On the Social Security side: There’s no free lunch.  It’s the safety net.  We’ll just have to pay for it.  “Third rail” of American politics?  I sure hope so.

    Overall, can retirement security be made more secure (or at least not less secure)?  Sure.  But to do that, politicians will need to persuade themselves and their constituencies that this will not be a painless cure.  It will just be better than the currently-threatened death by an thousand cuts.

New Initiatives Regarding Pension Plan Freezes

The DB system continues to contract.  With new FASB disclosure rules and greater funding volatility under PPA, additional DB plan freezes can be anticipated.  Last year a number of healthy major companies announced plan freezes. 

Once a plan is frozen, it may present a number of long-term regulatory issues for the plan sponsor.  But perhaps more importantly, in a typical situation, a plan sponsor may look at continuing to sponsor a frozen DB plan as more of a required nuisance than something it is really interested in doing.  And, some of the factors that probably generated the freeze in the first place (e.g., FASB and funding volatility) continue even with a frozen plan.  We understand that many companies with frozen plans would prefer that they not have to continue sponsoring them, with all that that entails. 

Most of these companies are probably waiting until asset values can cover the costs of acquiring shared annuities.  However, the insured annuity market has limited capacity to date and, of course, represents an expensive alternative for a company that wants to rid itself of pension liabilities.

Recent press and other reports have indicated that a number of large Wall Street and other financial institutions have an interest in "acquiring" frozen plans at a lower cost to sponsors than insured annuities.  The plans would continue to be maintained by the acquiring institution which would assume all funding and other legal obligations for the plan.  The acquisition of the plan would occur through the vehicle of a business acquisition of a subsidiary of the employer sponsor.  The subsidiary would assume responsibility for the plan prior to the business acquisition.  Employer sponsors would have to contribute some cash or other assets to the business transaction representing the negotiated determination of any plan underfunding (although such amount would presumably be less than would be required to purchase insured annuities). These assets would be dedicated to the pension fund, but held in a "side-bar" non ERISA vehicle.

The benefit to plan participants would be the plan would remain subject to ERISA, carry the PBGC guarantees, and reflect enhanced security because of the additional dedicated assets as part of the business transaction.  The benefit to the historic plan sponsor is that it has rid itself of the plan in total and everything that goes with it in a responsible fashion.  Presumably, the acquiring institutions would make money through enhanced investment portfolio techniques which would allow it, over time, to not have to contribute the entire dedicated additional asset funds to the plans.  We understand that well-capitalized entities with significant capital dedicated solely to acquired plans would be involved in these transactions.  These tranasctions could apply to plans in whole or to just the terminated liabities of such (e.g. retirees and terminated vested).

The transactions would seem to be permissible under existing law if properly structured.  No doubt, PBGC would have a strong interest in assuring plan security and its own well-being.