BNA Pension and Benefits Blog

An Alternative to "Employee" Benefit Plans

ERISA has served American workers relatively well over the past 30 plus years.  Millions of employees have achieved relative retirement security with significant pension and retiree health benefits.  Employers have presumably found employee benefit plans to be a generally positive means of attracting and retaining workers and easing them into dignified retirement in order to replenish the workforce (or sometimes downsize it).  However, the entire employee benefits system has become frayed at the edges, if not the core, and currently seems not to be serving either employers or employees well in many situations. 

ERISA has been constantly amended and Congress, the regulatory agencies and the courts have imposed many burdens that employers would prefer not to deal with.  And the business and economic landscape has changed dramatically over the years.  The DB system appears to be in its death-throes.  Even healthy, successful companies are freezing their plans.  And generous retiree health plans are already a thing of the past except for a relatively small union workforce in certain industries (and even there it is not sustainable). 

Accordingly, we need some alternative to the current system.  I suggest a program under which benefit programs are disassociated from employer sponsorship.  The plans could be developed and provided by major financial, administrative, insurance and other companies.  The programs could pretty much parallel the types of designs that are in use today, even though there would be complete portability and probably only account-based DB type programs under which an account balance could be used, at ultimate retirement, to acquire lifetime annuity benefits.  Employers would provide funding for the benefits which could be flexible from year to year and be subject to some nondiscrimination standards.  Individuals would supplement employer contributions with their own.  People without an employment and employment relationship would also participate in the system.  The current tax advantages for employee benefit plans could largely be preserved, but there would probably need to be a cap on the tax advantage healthcare premium (i.e. amount that either an employee could receive from an employer tax free or that an individual could pay himself/herself on a tax deductible basis- note below, I am proposing equality of access and treatment between employees and those and those not employed).  Presumably, these programs and the new sponsors would be subject to a uniform federal regulation generally similar to ERISA and employers would be permitted to either maintain their own ERISA plan or elect for the new non-sponsorship model.  Health benefits would probably need to be developed through community rating and regional plans somewhat analogous to Medicare part D (with some form of cross subsidy between local or regional plans based on age and experience demographics of each plan's participating pool).

The entire program would certainly be easier to establish for financial type benefits (e.g. 401(k), account based db, life and disability insurance) than it would be for active and retiree health coverage (because the latter would require other market force and legal changes).

The benefit to employers who are willing to continue to provide significant funding for benefits is that they would have little or no fiduciary responsibilities or other obligations associated with sponsorship and they would have no long-term financial commitment to the vagaries of pension funding or the cost spiral of healthcare.  The benefit to employees and others who would now gain access to a benefits system is complete portability, continued partial funding by employers, and equality of treatment of those working and those not working (who could fund their own benefits, or if deemed poor, could receive some government subsidy). 

This new benefit design would, of course, require legislative and regulatory changes and assumption by various companies in the financial and other industries of responsibility for new plan design, effective sponsorship, some financial risk (although that could be limited because DB benefits would presumably be account based and health benefits would be repriced each year as they now are), and fiduciary responsibilities. 

More Mandated Benefits? Stop! Think!

More Mandated Benefits?  Stop!  Think!

    ERISA regulates and mandates a system that is, above everything else, voluntary.  In my view, mandates have no place in it, not because they are not good objectives, but because they are not voluntary, not free, and inevitably counter-productive.

    Why not mandate?  Because mandates undermine the voluntary market - a market that produces for the employees of most participating employers a package of benefits that is better than anything a government could or would mandate .  The voluntary market is not universal (like Social Security or Medicare).  It is a result of business decisions to provide these benefits because they are good business.   Universal mandates (for example, so-called “Mandatory Universal Pensions” or “MUPs”) are always just a devious way of making private employers pay for a safety net that should be paid by taxes.  A mandate will always be minimal, like the minimum wage, because it is a national, universal, rock-bottom benefit.  That is not what private employee benefits are about.

    Why not mandate at the state level (like Maryland’s Pay or Play)?  Same reason, only worse: It’s not even a universal mandate.   It’s still ultra-minimal.  And it guts the private employee benefit system’s cornerstone – federal preemption.  It just balkanizes the system.

    But why not abandon federal preemption?  Take a look at 14(b) of the National Labor Relations Act (the so-called “right to work” provision).  The supporters of non-preemption are, these days, at the liberal end of the political spectrum – and there they are supporting the same theory as “right to work” laws (which they have always opposed).  Those who ignore past experience are condemned, of course, to repeat it.

    Once that preemption door is opened, what, inevitably, also comes through it?  How about these: Each new unpreempted state law will come with a new unpreempted state remedy (without which, of course, the state law is meaningless).  And that state remedy – bet on it – will come with compensatory and punitive damages – the very thing that ERISA preemption sought to head off. 

    What’s wrong with that?  If you don’t know, you won’t care, but it’s the death knell of the ingenuity and further development of the private voluntary system.  It just converts the floor into a ceiling.

    The moral to the story?  If you want to pass a federal benefits law (“National Health” for example), OK.  Go for it.  But do it as a governmental benefit with governmental financing and governmental control.  Don’t pretend it is or should be part of the private voluntary ERISA system.  In the private system, it’s pure poison.

A New Year’s Wish: Why Not Try More Beneficial Benefit Planning?

A New Year’s Wish: Why Not Try More Beneficial Benefit Planning?

As the mountain of new-year, new-law, alerts and warnings mounts, wouldn’t it be nice if sponsors and their advisors paid a little more attention to the beneficial purposes of a benefit plan?

Of course, lawyers and actuaries cannot be expected to ignore the potential for problem-discovering, alert-related, problem-solving, business-generating, fee-generating professional work growing out of the new law, new FASB rules, new SEC rules, new regulations, and the like. The profit opportunities are too great to ignore.

But wouldn’t it be nice if we also helped our clients to remember the serious needs of their employees and the benefit-planning opportunities that are the real reason why these plans developed in the first place?

What, exactly, does that mean?

How about some of these now-controversial ideas: Maybe considering how NOT to terminate, or NOT to freeze? Or at least how NOT to completely freeze a defined benefit plan? Or how about even perhaps doing the unthinkable and establishing new (but modest) DB plans, while diminishing the cash-flow risks (e.g., using more conservative actuarial assumptions, methods, and benefit definitions, and eschewing unpredictable contingent event benefits, limiting new unfunded past service credits)? After all, the "normal cost" of DB plans is not often the land-mine or booby-trap – it’s the present value of unfunded accrued liability where the risk lies, and, with care, that risk can be diminished or even avoided.

And how about combining modest DB plans with 401(k) supplements (many proponents’ original idea behind 401(k) plans in the first place)?

And how about putting some new restraints on DC plan cashouts, so that lower-paid employees (those who need pensions the most) are not the ones with the most cashouts? After all, 401(k) plans were invented to be retirement plans, not mere receptacles for short-term savings.

And so on.

This isn’t rocket science. It’s a question of role definition(s). The temptation to view plan sponsorship and "settlor functions" as a cash opportunity for employers (stockholders) may be real and substantial. But in a world in which outside advisers have taken on such a large role, perhaps we professional should remember, at least, the advice of a famous lawyer and outside general counsel who once wrote that he considered one of the primary responsibilities of outside counsel to be this: on an appropriate occasion, when asked to opine on a proposal that would be lawful but perhaps completely shortsighted, to look your client in the eye and say (what inside lawyers might not feel free to say): "You are damned fools and should stop." (Sol Linowitz, The Betrayed Profession, p. 4 (New York, Charles Scribner’s Sons, 1994), p. 4, quoting lawyer, cabinet member, diplomat, and Nobel Prize winner Elihu Root, ).

It takes some guts for a professional to say it, and it takes some character for a client to pay heed to it, but what a New Year that would be.

The Defined Benefit Plan System: What Does the Future Hold?

In the year 2005 we saw a national debate on the nation's most important defined benefit plan, Social Security. The nation overwhelmingly expressed its sentiment that the system of work-related, guaranteed lifetime benefits provided the security that people wanted for themselves, members of their family, and the nation as a whole.

But the private defined benefit plan system has been withering away without any great public debate. Whether for reasons of cost, competition, volatility or other business reason, employers have been steadily and increasingly choosing to move away from defined benefit plans. The recently enacted Pension Protection Act is not likely to reverse this trend, and in combination with new accounting rules, we are likely to see this trend accelerate. In their place, we have defined contribution plans that place the risk on the individual. These risks include the risk of not contributing, of not investing well, of prematurely tapping funds, and of taking a distribution that does not last a lifetime. These risks will affect millions of families, and my guess is that many more will have retirement incomes lower than previous generations.

Had this trend been brought up for public debate, how would the American public have responded? And should we change course, or is it too late? Perhaps more importantly, is the choice simply between retaining the old defined benefit plan system, and moving to 401(k)-type plans?

Most benefit professionals seem to believe that 401(k) plans simply shift too much risk onto employees, and simply are not going to provide the retirement security of the old defined benefit plan. But employers do not want to assume all the cost and risk associated with traditional defined benefit plans. But must a plan have the risk assumed entirely by the employer OR the employee? Are there not arrangements where part of the investment and volatility risk and/or longevity risk are better shared? Is there a next generation of pension plan on the horizon, one that better meets the needs of both employers and employees?

Unfortunately, these changes are happening largely outside the great public debate. We will need to address these private pension plan issues in the larger context of long-term retirement security if we are to get a better handle on the direction we want for this country.

And in the meantime, long live Social Security -- it may increasingly be all that most people have.

Oh yes, oversight ...

How could I overlook the possible impact of the shift in power in the Congress on Congressional oversight mission, and, in turn, the possible impact of Congressional oversight on the world of employee benefits?  If nothing else, we're less likely to see a resurrection of the Department of Energy's announcement that it would not reimburse contractors for defined benefit plan costs, or for the cost of more than a minimal health coverage package.

Where else do you think Congressional oversight might affect agencies' approach to benefit regulation?

Election Impact?

I'm still yawning from staying up late (for a school night) to see what happened, how The American People made their views known to the governing class.

There are any number of levels to the question, what will be the impact "on us" of the transfer of power. 

"Us" includes, of course, all of us as citizens -- will the election outcome hasten the day that we stop precipitating and experiencing deaths and mutilations in Iraq?  Maybe there's a qualified sorta yes in there, given the swift resolution of Secretary Rumsfeld's DOD career prospects.  Will it lead to more generous policies for the lower economic rungs in our society?  A less qualified yes, at least in terms of an increase in the federal minimum wage.  Note that not only was this on the Democrats' agenda, it was on the ballot in six states and passed in every one -- by contrast, measures to ban same-sex marriage were on the ballot in seven states, but only passed in six (Arizona seems to have defeated it).

[EVEN MORE THAN USUAL, THE IMMEDIATELY PRECEDING TEXT GIVES MY OWN PERSONAL VIEWS, NOT THOSE OF EMPLOYER OR CLIENTS.]

What about as a community especially concerned with general issues of retirement security and access to health care?  The main impact I see at this point is a slowing down (if that's possible) of a drift toward the Ownership Society.  Beyond that, it's hard to envision substantive changes in Social Security or Medicare.  Even if they could agree on a reform program, the Democrats don't exactly have veto-proof majorities in both Houses.  Besides, the next election is only 2 years down the road -- not enough time to tackle the major entitlements.

So what about the rules governing employee benefits?  My guess is that everyone is too exhausted from this year's battles to be willing to reopen the PPA.  However, there may be a little more give around the edges, perhaps in defining what exactly is meant by "technical corrections."  If next year's Congress had been sitting this year, there are some parts of PPA that would probably have come out quite differently: maybe hybrid plans, investment advice, treatment of credit balances in single employer plans, for example.  But undoing what's now in there is a great deal harder than putting it in in the first place (3d rule of lobbying). 

What do you think?

PPA Tidbits

On the ABA Joint Committee on Employee Benefits teleconference last Thursday, Bill Bortz from Treasury cleared up some issues that have been creating uncertainty under the newly-enacted Pension Protection Act of 2006:

• Bill said the restrictions on funding executive benefits when the defined benefit plan is underfunded won't be effective until the funding rules become effective in 2008 or later. The restrictions resulting from the employer's bankruptcy, however, are effective immediately.
• On faster vesting for cash balance plans, he confirmed it only applies to the cash balance portion of the plan, not to traditional benefits that are grandfathered or benefits for participants in the plan that only have traditional benefits.
• On how the 2-year averaging works for calculating the funding interest rate under the new rules, he said it was a simple average not a weighted average as under current law.

I've attempted to summarize the new funding rules and related benefits restrictions in one page. Certainly not all you'll need by 2008 when these rules become effective, but hopefully enough to get you started. BNA has established a Pension Protection Act Center with materials from a number of sources to help you come to grips with the new Act.

Nell Hennessy
nell.hennessy@fiduciarycounselors.com
202-558-5141