The final 408(b)(2) regulation is out. Because of the regulation many sponsors will receive more information in more detail about fees than in the past. Sponsors also will receive a new compliance obligation. They are responsible for insuring that plan providers have appropriately delivered the required information. These are significant changes. Included in the regulation is a suggested voluntary roadmap to help plan sponsors identify and locate the fees that the DOL has determined should be disclosed. Help is needed if plan sponsors are to comply with the new regulation. The voluntary roadmap is a good way to help them.

Here is how complying with the new regulations will work in practice. The plan sponsor will receive a quantity of information from the plan providers, usually compiled by the plan’s recordkeeper. Imbedded in this information will be detailed fee information that the plan sponsor will be required to identify and evaluate. For large employers this is no problem. They have internal expertise and are advised by the country’s top retirement plan experts. In fact they are already getting this information. For small and medium sized employers the situation is different. Most do not have internal expertise and their advisor, to the extent to the extent they have one, is an expert on investments but not the technicalities of ERISA.  

In short, plan sponsors must review the material they receive so they can determine whether the providers have complied with the regulation. If the sponsor determines that the disclosed information has been reported as required then the sponsor must organize the disclosed information so that it can be properly evaluated.  Identifying, organizing the evaluating the disclosed information not only will take significant time, it will require an understanding of the regulations which these plan sponsors do not have. Some will hire expert assistance at hundreds of dollars an hour to do this for them. Those that try this on their own take a significant risk. If they are audited by the DOL, the DOL auditor will review the disclosure in detail and if the disclosure does not meet the standard or the auditor determines that the sponsor has overlooked something material in the disclosed information when doing the fee evaluation, the sponsor will be penalized by the DOL.

The question is will an owner-manager of an 80 employee firm struggling to remain solvent in the current economic reality be willing to spend the hours necessary to read and evaluate this material? Will they be willing to pay the thousands of dollars necessary to hire a competent evaluation by an expert? If not, what better way to help them than to use the suggested solution provided by the DOL. If the road map accompanies the 408(b)(2) disclosures it will help plan sponsors organize the information in the disclosures so they can more easily perform an appropriate fee review. It will also help them with their new compliance responsibility for insuring that the providers making the disclosures have met the requirements of the new rule.

However, this is not the end of the story. DOL has announced it will undertake a review to determine if such a road map or a summary of the information needs to be required as part of the 408(b)(2) disclosure. PSCA supports such a requirement and will be filing comments to that effect with the DOL.

It will have been over five years of abnormally low interest rates by the end of 2014. This means that interest paid on high quality bonds and principle-secure investments will continue be virtually zero.  In addition, with interest rates now so low there can be no capital gains on bonds unless interest rates go negative. Some say this is critical to our economic recovery. That may be true but it is bad news for retirement. Funding both traditional defined benefit pension plans and cash balance plans has become more expensive as plan investment returns continue to underperform actuarial projections and plan return targets.  Traditional pension plans permitting lump sum distributions are especially affected. Lump sums are calculated using current interest rates and the lower the interest rate the larger the lump sum. This incentivizes retiring participants to take lump sums depleting plan assets and increasing the required funding level to make up the shortfall. With interest rates near zero, those in IRAs and employer-sponsored defined contribution plans could be forced into riskier investment strategies by the certainty of lower accumulations if they maintain their allocation to fixed investments. This will be especially true for those approaching retirement who are most in need of returns but who are most at risk if the equity markets fall. The continuation of low interest rates combined with the message that our economic growth depends on consumer spending, not consumer saving, is bad news for saving in general.  Returns matter and no returns on saving gives younger workers another reason to choose spending over saving. Continually telling younger workers that spending creates jobs just ices the cake. We have push back against the message that spending is more important than saving. We have to continue focusing on the future. Saving and investing is critical to our long term prospects.

To understand today you have you know about yesterday. When 401(k) plans were introduced in the early and mid 80s, American employers were in the process of laying off millions of workers in their late 40s and 50s. Distrust of employers was at an all-time high. To overcome this, 401(k) plans were designed so that participants had control, and their money was invested in mutual funds so that participants could see in the newspaper that the funds were real and they could verify how they were doing independently of their employers reporting. This was followed by the go-go nineties, when the number-one complaint about an employer's plan was that it had too few choices and major periodicals were evaluating plans based on the number of choices and complimenting those with the most.

This mindset changed with the shocks of the 2000-2002 period and most participants today trust their employers more than others and now look to employer selected solutions to help with their asset allocation and even the decision about how much to save. Simpler is becoming more available and within a short time virtually all participants wanting their employer to make these decisions will have that option, either passively or actively. At the same time most plans will continue to have choices beyond what is employer directed for the minority who want them. Employers want plans that satisfy every employee and for most plans this will continue to require options. FYI the availability of brokerage accounts continues to grow slowly according to PSCA survey data.

It is rarely recognized, but one of the great attributes of the 401(k) system is its flexibility and capacity for innovation. 

The December 14 edition of USA Today included a letter headlined, “Stay Away From 401(k),” written by Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees. On December 12, Thomas DiNapoli, New York state comptroller and sole trustee of the New York State Common Retirement Fund, in a speech at the New School's Schwartz Center for Economic Policy Analysis said, "The reality is that 401(k)s were never intended to take the place of pensions. Laws governing state pension funds shouldn't be changed to allow defined contribution plans to replace defined benefit plans because 401(k) plans are woefully inadequate for those who rely on them for their primary retirement income." 

Coincidence? I don’t think so. For the last several years claims that the employer-sponsored defined contribution system is “inadequate” have rained down on us from every quarter.  This has been a significant change from the 1990s when concerns were raised about the 401(k) system but the coverage was generally favorable.  After all, shouldn’t workers be saving for retirement, and what better place than in an employer-sponsored plan? What is going on? The change can be dated to the recommendation by Arnold Schwerzenegger, early in his term as governor, that the pension program for California’s public employees be replaced by a defined contribution approach.

Since Schwerzenegger’s call for change, state and local governments around the country struggling with funding their defined benefit promises have begun considering defined contribution solutions. You may have seen here and there stories about state legislatures considering defined contribution solutions, but only recently has reporting about the struggle over the delivery of retirement benefits to state and local employees gotten national attention. It is clear that attacking the 401(k) system is one tactic used by those supporting traditional pension plans for state and local workers. They fear that if people believe the 401(k) system can be successful, it will be politically easier for elected officials to vote to replace current pension programs with defined contribution plans. They may also fear that support among younger government workers for the current system will erode.

It’s time for balance in the discussion about whether or not defined contribution plans can provide “adequate” retirement benefits. Workers in the private sector change jobs an average of seven times and typically work no longer than 16 years for any one employer. Rather than using a snap shot of the current balance of workers in a private sector 401(k) plan to make the evaluation we should be looking to the results delivered for almost 100 years to participants in the TIAA/CREF defined contribution program.  Have they had “adequate” retirement benefits? You bet.

Push will come to shove when whoever is elected in the 2012 election is forced to tackle our federal fiscal problems. The tax deferral provided to the employer-sponsored retirement system will get intense scrutiny as part of this process. Thus, it is critical that decision makers have the best possible information as they apportion the pain among federal programs, whether they are supported with direct expenditures or indirectly with tax incentives.

One standard for determining the availability to workers of an employer sponsored retirement plan has been the Current Population Survey (CPS). The CPS is a monthly survey of about 60,000 households conducted by the United States Census Bureau for the Bureau of Labor Statistics (BLS). The BLS uses the data to provide a monthly report on the Employment Situation. The survey asks about theemployment status of each member of the household 15 years of age or older in the calendar week containing the 19th day of the month. Based on responses to a series of questions on work and job search activities, each person 16 years and older in a sample household is classified as employed, unemployed, or not in the labor force. The survey also includes a retirement question that is the basis for determining the availability of retirement plan coverage to American workers.

The argument that only half of the private sector workforce works for an employer that offers a retirement plan springs from the annual March supplement of the Current Population Survey.

Unfortunately, the wording of the retirement-related question is “Other than Social Security, did [any] employer or union that (name/you) worked for in [the past year] have a pension or other type of retirement plan for any (emphasis added) of its employees?” We all know that the federal government and just about every state and local government entity have retirement programs for their employees. However, in response to the 2011 questionnaire 22% of those indicating they work for the federal government and 21.5% of those indicating they work for a state or local government responded “no” to the question—a shockingly wrong response.  When a question elicits such an enormous number of obviously wrong answers the question is flawed and the results are suspect.

Furthermore, if a substantial portion of relatively well-educated government workers do not know that their government employer offers a retirement plan to any of its workers, how can we expect the private sector workforce to be more accurate in their response to the question? Fifty-two percent of those categorized as private sector workers responded to the CPS retirement question saying that their employer did not offer a retirement plan to any of its workers, even though virtually every private employer with 100 or more employees offers some type of retirement plan.

We’ve known that the CPS under reports coverage, but even we were surprised that the error is so large.  Add 20 points to the private sector findings, and you get a coverage figure that resembles non-survey results, such as a study of tax records by the Social Security Administration or the Bureau of Labor Statistics’ National Compensation Survey of employers.

Our glass is definitely more than half full.  Our job is not finished, but we are in much better shape than our opponent’s claim.