VOL. 22, NO. 3
AUTUMN 2009
BENEFITS LAW
JOURNAL
Risk and Responsibility
T
he Great Recession has given voice to a growing chorus of pension activists in Washington chanting that “the 401(k) is broken”
and America has failed to deliver on its supposed promise of “a secure
retirement.” The solution they propose is an unbalanced three-legged
stool that would assign the lion’s share of risk and responsibility to
Uncle Sam and employers and leave workers themselves largely off
the hook.
To be sure, ensuring a secure retirement for all is an entirely
appropriate goal for the nation. Like many observers, I’ve long noted
that increasingly poor financial habits, the decline of defined benefit
plans, and mounting troubles with Social Security have left individuals
entirely unprepared for the key risks of retirement planning—namely,
inadequate savings, longevity, and inflation. But what’s happened to
the role of personal accountability? The would-be pension “reformers” have it so wrong, it’s scary.
Risk. The four-letter word of retirement planning, risk, is not a
recent phenomenon—it’s existed since the first caveman hung up his
club and tried to live off his cache of stored nuts and berries. The
Worst-Investment-Market-Since-The-Great-Depression—a meltdown
that so far has cost 401(k) and other defined contribution plan participants some $2.8 trillion—is a painful reminder that no investment
is bullet-proof. Secure money market funds can break the buck;
“guaranteed” stable value funds can lose money if a plan terminates
when market value is less than book value; real estate investment
funds can suspend withdrawals; and security lending can unexpectantly backfire. And, periodically, novice and sophisticated investors
alike are bamboozled by Ponzi schemes.
What’s changed in recent years is the increased possibility that a
retiree will outlive his or her retirement savings. It’s not just that people are living longer, but that retirement age has not increased with
From the Editor
longevity (or has even gotten younger). Most folks no longer work as
long as they can. But inflation has been around since people switched
from barter to currency. And no one has discovered a magic bullet to
protect against longevity (which, after all, is a good). These risks can
only be hedged or shared through financial products such as annuities that essentially allow individuals to pool their money, with the
folks who die early covering those on the other side of the mortality
curve. Stuff happens, and risk always will be with us.
Responsibility. The first line of defense against the financial risks
of retirement has always been to save more money than you think
you’ll ever need and invest it prudently. Yet, over the last couple of
decades, our national savings rate has plummeted, occasionally going
into negative territory. This trend has resisted ubiquitous media attention, employer-sponsored 401(k) plans with matching contributions,
investment education, relentless advertising by mutual fund families,
insurance companies and Wall Street, and the like. Some headway was
made in the 2006 Pension Protection Act, which gave employers significant new legal protections and incentives to add auto-enrollment
and auto-increase features to their 401(k) plans. Behavioral economists had argued—and experience to date has shown—that when
employees have to take deliberate action not to contribute to their
company’s 401(k) plan, inertia propels most to default to saving.
However, it seems to have taken the Great Recession to change
things. The national savings rate is finally heading up and many
economists and social scientists believe this is likely to be a long-term
change in people’s outlook and behavior. Unfortunately, now that
folks are starting to get the concept of saving, the answer being proposed is to kill the 401(k). The Obama administration and Congress
now question whether the Treasury is getting its money’s worth for
the $53 billion plus a year in lost revenue for 401(k) and defined
contribution plan deductions.
It is telling that these critics presume that it is the US government’s
money that workers are being generously allowed to keep, rather
than the taxpayer’s own earnings that the Treasury is losing out on.
In fact, such deductions don’t cost the Treasury a penny. The misunderstanding arises because tax revenue is scored by estimating
the additional money the Treasury would pocket over ten years if
401(k) contributions were taxable. But with 401(k) plans and other
tax-deferral programs, the correct measurement is actually the present
value cost of the delayed tax revenue. The present value is a fraction
of the $53 billion cost of 401(k)s. (For an excellent analysis of this
issue, see “Revenue Estimates and Tax Policy” by Judy Xanthopoulos
and Mary Schmitt.) However, given Congress’s propensity to spend
between 105 and 110 percent of tax revenue, the 401(k) tax deferral actually saves the Fed money. Not to mention that those deferred
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VOL. 22, NO. 3, AUTUMN 2009
From the Editor
taxes get paid when employees retire and begin withdrawals—just
when it will be needed to cover the added strain these new retirees
will place on Social Security and Medicare entitlements.
That’s only the start. In white papers and Congressional hearings,
the folks at such organizations as the Pension Rights Center, the
Retirement U.S.A. team, and Alicia Munnell at Boston College’s Center
for Retirement Research advocate replacing 401(k) plans with an
employer-provided, government-backed system that would assume
all investment risk. Some advocates, most notably Teresa Ghilarducci
of the New School for Social Research in New York, actually call for
a government-guaranteed investment yielding some 4 percent above
inflation.
Sadly, there is no Tooth Fairy. The simple reason why this
approach is lunacy is that when savings rates and investment returns
are inadequate, the difference must be made up by someone. The
United States is not a separate entity from its citizens—ultimately,
taxpayers themselves will foot the bill for any government-sponsored
retirement program that seeks to guarantee everything to everyone.
Why should workers as a group have to pay for the spendthrifts who
do not live within their means? If employers are required to provide
such a guarantee, the funds will end up coming from employees
themselves, generally through lower wages or job losses. In the worst
case, if the shortfall can’t be funded, the employer may be forced out
of business. It should be an obvious point that the cost of any benefit
mandate or funding obligation will cause a dollar-for-dollar reduction
in current wages.
Of course there are serious problems existing within the current
retirement system. Tax and ERISA rules are overly complicated and
burdensome. Fully half of workers are not covered by any employer
plan, thereby losing the retirement infrastructure and tax benefits that
come only with an employer plan. Changes are needed to discourage pre-retirement leakage of retirement assets and to help make a
nest egg last a lifetime. There may be better ways to invest retirement
dollars and educate employees. Perhaps it may be worth debating
whether the government should require that all workers contribute
to some sort of funded retirement program. And, without a doubt,
there are some folks who will need extra support, whether because
of poverty, illness, incapacity, or whatever.
Risk and Responsibility. There will always be risk and uncertainty.
The US government can no more guarantee a secure, inflationproof, low-cost, steady lifetime pension than it can outlaw gravity.
Everything has a cost. While employers can help employees prepare
for retirement, they cannot compel financially prudent behavior, and
any employer retirement benefit will end up being paid for through
lower current wages.
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From the Editor
Ultimately it is, and should be, up to the individual to achieve his
or her financial well-being through some combination of hard work,
delayed retirement, increased savings, and lower material expectations. What our government can do is to better police the financial
markets, make it easier for employers to adopt and maintain retirement plans, as well as to nudge their employees to save, invest, and
prepare for their own financial future.
David E. Morse
Editor-in-Chief
K&L Gates LLP
New York, NY
Reprinted from Benefits Law Journal Autumn 2009, Volume 22,
Number 3, pages 1-3, with permission from Aspen Publishers, Inc.,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437,
www.aspenpublishers.com
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