Ten years ago, after bipartisan negotiations and amid high expectations, President George W. Bush signed the Pension Protection Act into law. Today, even PPA supporters acknowledge it failed to protect pensions, which are now on the actuaries’ endangered species list.
Instead, in Panglossian fashion they point to the “success” of automatic enrollment into 401(k)s — ignoring the fact that, despite auto enrollment, neither access to nor participation in workplace retirement plans has improved very much. The expansion of 401(k)s served the financial services industry far better than it has individual participants. It could serve both.
Mistakes of 2006
The Pension Destruction Act. PPA was spurred by a handful of large bankruptcies after the stock market drop in 2001. That drop left virtually all pension plans underfunded. Most companies responded by making additional contributions, but a handful, mostly airlines and steelmakers that had more fundamental problems, took advantage of bankruptcy to “dump” their underfunded plans on the Pension Benefit Guaranty Corp. The resulting PBGC deficit alarmed both the administration and Congress.
Rather than give the PBGC the ability to solve its shortfall by raising premiums or focusing on the small number of distressed plans, the administration and Congress instead tried to eliminate underfunding in all pension plans: The PPA dramatically tightened both funding requirements and the measurement of “underfunding.” When the stock market dropped again much more severely in 2008-‘09, the majority that were at no risk of bankruptcy nonetheless suddenly found themselves responsible for unexpectedly huge contributions — just when they wanted to preserve cash to protect their businesses. Virtually all complied, but many decided they didn’t want to repeat the experience: the number of Fortune 500 firms that froze their plans almost doubled from 2009-‘15 and the trend continues.
The PPA “protected” pensions in other ways. Many companies, in order to avoid the risk of large underfunding payments, considered switching to hybrid defined benefit plans where benefits didn’t rise unless the market did. PPA made it harder to switch to a hybrid plan. So many companies instead converted new employees entirely to 401(k)s.
At least we have 401(k)s. Most retirement experts, not admitting self-inflicted wounds, now ignore pensions and instead point to a PPA-enabled flowering of 401(k) plans. They note that PPA let companies automatically enroll employees into a savings plan, converting an “opt-in” requirement to an “opt-out,” thereby endearing pension policy folks to behavioral economists everywhere. A recent event on Capitol Hill “celebrating” the PPA focused exclusively on DC plans.
But for all the celebration of auto enrollment and auto escalation, both the offering of 401(k)s and participation in them barely budged. According to the Employee Benefit Research Institute, in the year PPA was enacted only 50% of private-sector workers were offered an employer-based retirement plan. Seven years after PPA, that percentage was 51%. Notwithstanding auto enrollment, the improvement in participation isn’t any better: in 2006, 40% of workers didn’t participate; in 2013, 39%.
Nor are the trends for those who do have 401(k)s particularly impressive. Savings rates haven’t kept up with increases in longevity. A shrinking percentage of plans offer lifetime income (and even when offered, few participants choose it).
This commentary isn’t nearly long enough to analyze PPA fully. So I’ll just mention in passing that its changes to multiemployer plans didn’t work out and the saver’s tax credit for participants for their contributions to employer-sponsored plans or individual retirement accounts didn’t actually increase retirement savings.
Ten years after PPA, fear of running out of money in retirement remains the No. 1 economic fear. Rather than pretend PPA was a success, let’s ask:
How can we fix the mistakes of 2006?
Don’t “protect” workplace savings plans — require them. In the Employee Retirement Income Security Act of 1974, Congress imposed pension standards on employers without requiring employers to offer pensions. In hindsight, that was a big mistake: 40 years later, many fewer employers offer pensions and most don’t offer anything at all. The PPA made it worse by tightening those standards.
As long as offering workplace savings is voluntary, most businesses won’t do it — and we’ve learned that if savings isn’t done automatically via paycheck, it rarely happens at all. What’s needed is to require employers to enable payroll retirement savings without making them fiduciaries and without requiring them to contribute themselves. This can be done by:
• Expanding Social Security, with appropriate tax increases. This approach is used by most other developed nations.
• Automatic enrollment in a retirement plan, giving individual employees the ability to change their savings level or opt out entirely. This “secure choice” approach is being implemented in California and other states.
Neither approach is moving in Congress. The only bipartisan proposal would let the financial services industry market retirement plans to multiple small businesses — but wouldn’t require them.
Don’t “protect” against lifetime income — encourage or require it.
The shift from traditional pension plans means most folks get a lump sum when they retire; as a result, many more people will exhaust their retirement savings.
Putting a portion of retirement savings back into lifetime income would help, but the PPA made that hard to do. The PPA allowed companies to set up a default investment option. To “protect” people from choosing unsound or expensive annuities, PPA set a higher standard. If companies want to include them in 401(k)s, they must warranty both the providers and their fees. Unsurprisingly, companies look at this and run the other way.
We can do better. We could stop discriminating against lifetime income and start encouraging or even requiring it. Several years ago, United Technologies Corp. started including lifetime income within its target-date default 401(k) option. Why not make that the “safe harbor” so others join them?
Protect consumers against bad retirement plans, not “bad” employers.With the focus on employers, there’s been little attention to retirement products themselves. There are no useful disclosure standards — much less requirements — on fees, on how much lifetime income a retirement plan might provide, or investment risks.
The departments of Labor and Treasury share responsibility for retirement policy, but neither has ever provided useful consumer standards for the tens of millions who are now forced to decide themselves how much to save, how to invest, and how much and how quickly to use the assets in retirement.
The agency that could do so, the Consumer Financial Protection Bureau, has been prevented by Treasury and Labor from using its expertise. If the two departments agreed, CFPB could help in what is, after all, the single most complex consumer financial transaction. Without real consumer standards and consumer protections, we’ll continue to have financial service providers offering sophisticated products to an unsophisticated populace. By the time folks understand how little retirement security they’ve purchased, they’ll be too old to do anything about it.