I posted here earlier this month about a provocative Wall Street Journal piece in which the creators and early adopters of the 401(k) retirement-savings vehicle lament the revolution they started.
Their point: They had no intention of watching the concept turn into the sole — and highly inadequate — savings receptacle for employees.
Now, on the heels of that, comes this piece on the October Three site by benefits expert Larry Sher taking that discussion even further, to a whole lot more wrong with the defined-contribution approach and the people who support it — i.e., the people with skin in its game. As Sher writes:
“Some objected on technical grounds — the annuity estimate could vary widely depending on a number of assumptions including life expectancies, market interest rates and inflation. Others viewed this initiative cynically, believing that it was just a first step toward mandating annuity availability in DC plans, thus leading to the prospect of huge sums of assets shifting from mutual funds and other asset managers to insurers.”
The chief concern of policymakers, employees and even some of the employers that have embraced the 401(k) concept, Sher says, “can be summed up as the total shifting of risks to employees — the risks that they won’t save enough, the risk that they will use the savings for non-retirement purposes, the risk of unfavorable investment results — culminating in inadequate retirement savings and the prospect of outliving such savings.”
To mitigate the problem of employees dipping into their funds for non-retirement purposes, he suggests employers impose greater restrictions on such withdrawals. Of course, he also writes,
Here’s one of my favorites of Sher’s points:
“When someone is sick they go to a doctor, not to medical school. Investment professionals have gone to investment school — a crash course in investments does little, or no more, than give employees a false sense that they know what they are doing. It’s like self-diagnosing a medical issue based on information on WebMD.
“The response from the DC world is default investments, such as target date funds. That helps but it still leaves employees vulnerable to temptations to time the market and apply their [inadequate]knowledge to making investment choices. Inevitably, the result is wide disparity in outcomes among plan participants — those with better outcomes being the better, or more likely luckier, investors.”
Sher’s solution to this DC mess is to establish a combination of a type of cash balance plan with a “market-return,” so interest is credited based on real-market investment returns rather than high-quality bond yields. He calls this the MRCB. Here’s how it would work, according to him:
“By providing some of the employer benefits through an MRCB, the employer is accomplishing all of the goals that the government and some employers are trying to achieve by changing DC plans to be something they are not meant to be. Employer pay credits would automatically be provided to all participants — no dependency on employee contributions. There would be no diversion of the benefits during employment — no loans or withdrawals. Annuities would be provided directly by the plan — thus avoiding the extra cost of retail-insured annuities.
“Yes, that means the employer retaining some long-term longevity risk — but even that is controllable by how the factors are set and managed over time to convert accounts to annuities. The MRCB typically would allow employees to elect lump-sum distributions upon termination or retirement [equal to account balances, with spousal consent], although the ability to elect lump sums can be restricted by plan design to the extent the employer considers that to be desirable.”
And where would such an approach leave the 401(k)-DC plan? In Sher’s words:
not the only show in town.
Copyright 2017© LRP Publications. Reprinted with permission from Human Resource Executivec (www.hreonline.com).