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

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.”



Living longer

Watson notes that the Obama administration has been working to find ways, without doing any harm to the current system, to allow individuals to craft more prudent retirement plans and try to plan for the possibility of living to a very old age while still relying on retirement income.

“I think the main point I’ll be making during the discussion is that business owners should think about whether the owner and the employees should have the plan set up to facilitate their longevity planning,” said Watson. “If you have a high-turnover business, if a typical employee is in your plan for two or three years, and if few people make 401(k) contributions anyway, there may be some businesses where those types of considerations don’t really match the expectations or even tolerance of the employees.

“But there will be other companies where a high percentage of the employees make careers with the employer and are in the plan for a long time and make significant contributions such that it may be appropriate to have the plan be set up to help them with longevity planning, and in a company like that, the business owners will want to be thinking about what kinds of options they might want to offer.”

Those options, says Watson, are beginning to change, prompted in part by the federal government.

“Do they want to offer annuities as an investment vehicle, do they want to offer annuities as a distribution mechanism? Do they want to offer this new kind of longevity planning annuity that would allow people to defer part of their account until they begin receiving it at age 85, and if so, they need to have the plan set up to do that.

“Now typically that kind of planning goes along with planning during the accumulation phase — the time when people are contributing. And, of course, the Department of Labor has really been trying to get plans set up to give employees investment advice and so forth so they do prudent planning for their investments as they go along.”

For more information on Watson’s presentation, click here.

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