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Beyond 401(k): Program will take a peek at new pension model

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Roberta Casper Watson was already practicing law when businesses began transitioning away from the old-style defined-benefit pension model (what your father and grandfather likely retired on) to the now-familiar defined-contribution 401(k) model.

Since graduating from Harvard Law in 1974, Watson has had an up-close view of the near-extinction of defined-benefit pensions (at least in the private sector), and she’s always felt a slight twinge of regret about the way most Americans’ retirement savings plans have been reconfigured.

“I’ve always thought it was sad that we moved away from the promised pensions,” said Watson. “I’m familiar with the factors that caused the pensions to go away. I worked with a lot of employers during the time that was happening, and I understand why they did it, and I don’t know what I would change in my version of the universe to keep that from happening, but I’ve always said that it was sad that it happened. I do think that given the 401(k) model is not going away anytime soon, there are things that do need to be done to make 401(k) planning more reliable for individuals.”

Roberta Casper Watson

On Nov. 11 at the Wisconsin Trade Center in Middleton, Watson will give a talk titled “Beyond 401(k): the New Pension Model” in which she’ll discuss the frequent failure of 401(k)s to provide retirees an adequate income stream. She’ll also go over some of the pension reforms that the Department of Labor is currently working on.

An expert on ERISA, employee benefits, and the Affordable Care Act, Watson will also address 2015 Obamacare changes for small to mid-sized employers. In addition, Paul Stang of Alliance Benefit Group will give a talk on how to help employees save more in their retirement plans.

As Watson recounts, the 401(k) model began to gain favor because of reforms enacted with the passage of the Employee Retirement Income Security Act of 1974 (ERISA). Pension reform became a key focus of some in Congress after Studebaker closed its plant in 1963 and many workers lost their pensions.

“ERISA created some safety in terms of benefit accrual, but it also created some funding requirements, and it created the Pension Benefit Guaranty Corp. to provide some insurance in case benefits still went by the way despite the rules, and of course the PBGC charges employers a premium,” said Watson. “So if you have thousands of employees, the premium is a lot of money and the funding rules require you to make real commitments, and of course it’s really easy to promise people something in the future and it’s much more complicated to make sure that the funding is there, and there’s always the needs of companies to respond to current wage requests, and so employers didn’t like having the restrictions on those retirement-age promises.”

Later that decade, other changes in the law set the stage for the explosion of 401(k)s, but many observers still see problems with the new model.

“[With the defined-contribution model], the benefit is going to be based entirely on what happens to be in the account and what it happens to earn during the time that it’s invested,” said Watson. “And that may or may not meet the needs of the employee in retirement, with particular sensitivity to what happens if the employee and/or the employee’s spouse outlives expectations.

“There are also issues about what are the best ways to invest money. You may still be in too many equities at the time of a downturn, like people who were close to retirement or even already retired in 2008. Almost all the investment categories took a hit then, and so there are issues about controlling spending and there are issues about what the investments should be in addition to issues about whether you’ve saved enough.”


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