Mike brings to this work his comprehensive experience and consummate technical talent in a beautifully readable book. A treasure.
--Frank Cummings, Former Adjunct Lecturer in Law at UVA Law School, Columbia Law School, NYU Law School, and ALI-ABA
Retirement Savings Policy reviews the basic policies that govern retirement savings plans, and their real world application, focusing on the key issues of finance, taxation, fiduciary conduct, and employee choice. The discussion is framed around the three fundamental challenges confronting employers and employees today the pension legacy, the 401(k) revolution, and the pressure, from policymakers, regulators, opinion leaders, and individuals, for changes that will put retirement security within reach of all Americans.
With more than 40 years experience in the field, Michael P. Barry provides both a wealth of practical detail best practices and concrete solutions and a broad framework for understanding the issues surrounding retirement plans and strategies. The result is a comprehensive introduction to the forces that drive sponsor, participant, and policymaker decision-making.
This is the perfect book for benefits and financial professionals who want a better understanding of the basic rules that govern retirement plan administration but also serves those interested in truly understanding the nuances and issues surrounding retirement plans and policies. The approach is practical, focusing on how US retirement plans actually work, how they are taxed (and not taxed), how they are regulated.
But it is also conceptual, devoting considerable attention to an understanding of why these plans work the way they do. Why regulators and policymakers are so focused on a handful of issues expanding coverage, reducing fees, fairness. And, at the highest level, what are the problems that we are trying to solve. As such, much of what we discuss will be of interest to a more general reader, who wants a realistic understanding of what is really at stake in current retirement policy debates.
Part I: The Defined Benefit Plan Legacy 1
Chapter 1: An Overview of Existing Plans 3
Chapter 2: DB Plan Basics 7
A Formula Benefit 7
Where All the Risk Is Borne by the Sponsor 9
The Three Risks of Retirement Savings 9
Chapter 3: The DB Valuation Challenge 13
The Challenge 13
The Time Value of Money 14
Going ConcernThe Portfolio Rate of Return Option 17
Chapter 4: The Regulatory FrameworkBenefit Insurance, Minimum Funding
Rules and Accounting Standards Affecting DB Plan Finance 21
The Pension Benefit Guaranty Corporation 22
The Pension Protection Act of 2006 22
Plan A: Tighten the Minimum Funding Rules 23
Plan B: Relax Minimum Funding Standards and Increase PBGC Premiums 24
The Current Minimum Funding Regime 25
The Current PBGC Premium Regime 26
The Accounting Regime, Very Briefly 27
How DB Liabilities Are Valued for Financial Statement Purposes 28
Chapter 5: The Regulatory FrameworkMinimum Standards for Retirement Plan
Design and Tax Code Nondiscrimination Rules 31
Minimum Standards 31
Spousal Rightsthe Retirement Equity Act of 1984 33
Tax Code Nondiscrimination Rules 34
Tax Code Limits on Benefits, Contributions, and Compensation 34
Chapter 6: Problems with the DB Design 37
Issues with DB Design 37
The Inadequacy of Pre-Retirement Income as an Index of Post-Retirement
Needs 37
The Inadequacy of a Flat Retirement Income Target 39
DOI 10.1515/9781547400294-206
The Significance of Post-Retirement Risk 39
The Inadequacy of a Benefit Design Based on a Full Career 40
The DB Benefit Is Significantly Backloaded 40
Significance for Corporate Culture 41
Chapter 7: The Cash Balance Plan Conversion Crisis 43
What Is a Cash Balance Plan? 43
Why a Cash Balance Plan? 45
Why Did These Plans Have a Surplus? 45
Why Does a Funding Surplus Matter? 46
Why Cash Balance Plans Solved This Problem 46
Cash Balance Plan Conversion = A Decrease in Benefits for Older
Employees 48
Massive Employee Pushback 49
Chapter 8: The Secular Decline in Interest Rates and the Viability of DB
Plans 53
What About the Other Two Sponsor RisksInvestment and Mortality? 54
A Fundamental Lack of Transparency 55
Chapter 9: Getting Out, Slowly 57
The Increased Cost of Plan Termination 57
Getting Out Without Getting OutThe Plan Freeze 58
Taming LiabilitiesLiability Driven Investments 58
The LDI Overlay 59
Chapter 10: Managing the DB LegacyReducing PBGC Premiums 63
Plan Funding, Briefly 63
PBGC Premiums, At Length 63
Pursuing a Contribution Policy That Reduces Variable-Rate Premiums 67
Variable-Rate Premium Fundamentals 67
Two Broad Strategies 68
Strategies for Maximizing the Value of the Headcount Cap 69
PBGC Premiums and Basic Retirement Policy 71
Chapter 11: The Cash Balance Alternative 73
The PPA Legitimizes the Cash Balance Design 73
Market Cash Balance Plans 74
Chapter 12: IntermezzoBasic Policy Considerations Part I 75
Two Kinds of Office 75
WhatAre the Retirement Benefits? 76
The Status of Subsidized Benefits 77
A Legitimate Expectation That the Employer Would Continue the Plan 78
DB Plans, a Verdict 79
Who Pays for Retirement Benefits? 80
Retirement Savings Tax PolicyTwo Views 81
Part II: Defined Contribution Plans and the 401(k)
Revolution 83
Chapter 13: The Rise of the 401(k) 85
Chapter 14: DC/401(k) Plan Basics 89
How Contributions Are Determined 89
How Assets Are Invested 89
How Benefits Are Paid 90
A Retirement Savings Design that Functions Like Compensation 90
What Happened to the Three Risks? 90
The Structure and Administration of 401(k) Plans 92
Chapter 15: The DC Adequacy Challenge 95
What Is Adequacy? 95
A Subjective Answer to the Adequacy Question 96
Towards an Adequate Policy Framework 96
Ambiguities 96
Three Sorts of Answers to the Adequacy Question 97
Adequacy of Investment 101
Payout 104
Chapter 16: Adequate Savings and the Regulatory FrameworkRetirement
Savings Tax Incentives 105
The Current System 105
Retirement Savings Tax Benefits 106
How Much Are These Tax Benefits Worth? 106
Methodology 107
Roth versus Regular Contributions 110
Retirement Savings Tax Incentives, Rothification, and the Budget 111
A Middle-Class Tax Benefit? 112
Does This System Work? 113
Chapter 17: 401(k) Tax Code Nondiscrimination Rules 115
The ADP Test 115
The Dollar Limit on 401(k) Contributions 116
Passing the ADP Test 117
Participant Education 117
Matching Contributions 117
Safe Harbors 118
Defaults 118
Chapter 18: Adequate InvestmentThe Asset Allocation Challenge 121
Participant Education 122
Default Investments 122
2007 QDIA Rules 123
DOLs QDIA Regulation 123
QDIA/Target Date Funds as the Preferred Asset Allocation 125
Chapter 19: ERISA Fiduciary Rules 127
Who Is a Fiduciary under ERISA? 128
What Are a Fiduciarys Duties? 128
ERISA Section 404(c) 129
Residual Obligations of Plan Fiduciaries Under 404(c) 129
General Fiduciary Standards 130
Prohibited Transactions 130
Prohibited Transaction Exemptions 131
Chapter 20: The Structure and Administration of 401(k) Plans, Revisited 133
Basic Organization 133
Fiduciary Selection and Monitoring of Plan Service Providers 133
The Structure of 401(k) Plan Fee Arrangements 134
Current Practice 137
Chapter 21: Why Fees? 139
First: Unlike in DB Plans, in 401(k) Plans Fiduciary and Participant Interests
Are Not Aligned 139
Second: Fees Have a Significant Effect on Retirement Outcomes 139
Third: Plan Fiduciaries Limit Participant Investment Choices and Negotiate
the Deal with Plan Service Providers 140
Academic Work on Fees 140
Chapter 22: 401(k) Plan Fees and Fiduciary Regulation 143
Fee Disclosure 144
Provider-to-Sponsor Disclosure Rules 145
Sponsor-to-Participant Disclosure Rules 146
The Fiduciary Rule, Round 1 146
Round 2 147
The Fiduciary Rule in Brief 148
A New Set of Impartial Conduct Standards 150
Regulation of Compensation Policy 150
Disclosures 151
Contract Requirement for Non-ERISA Plans and IRAs 151
Implementation, Criticism, Challenges 151
Fifth Circuit Vacates the Fiduciary Rule 152
Assessing Fee Regulation Efforts 152
Chapter 23: Fiduciary litigation 155
The Problem of Proof 155
Generic ServicesRecordkeeping 156
Chapter 24: Fiduciary Best Practices and Managing Fiduciary Risk 161
Key Process Elements 161
A Broad Range of Alternatives 163
Chapter 25: An Adequate Payout 169
The 401(k) Payout Challenge 169
Individual Choice vs. the Right Choice 176
Chapter 26: IntermezzoPlan B 183
Continued Workthe Good News 183
The Other Plan B: Moving In with the Kids 185
The Worst Case 186
For the Most Part, a First World Problem 188
Part III: The Future 189
Chapter 27: The Demographic Background 191
The Age-Old Problem of Old Age 191
The Wealth Transfer Paradigm 194
The Socialization of the Paradigm 195
Money versus Time 199
Turning Savings into Investment 199
Chapter 28: The Great Transition 201
The Ratio of Workers to Retirees Is Going to Go Down, Significantly 201
In the Transition from PAYGO to Funding, Someone Will Have to Pay
Twice 202
The Transition to the 401(k) System Caught Baby Boomers Mid-Career 204
Chapter 29: Covering the Uncovered 207
How Big Is This Problem? 207
What Sorts of Employers Dont Provide Plans? 208
What Is Preventing Smaller Employers from Implementing Workplace
Retirement Plans? 208
Reducing Administrative Burden and Cost 210
Increasing Incentives 213
And the Gig Economy 215
Chapter 30: The Implications of the Software Revolution for Retirement
Savings 219
The Current System 219
The Distributed Ledger Technology Revolution 221
Are There Situations in Which Friction Is a Feature, Not a Bug? 223
Are There Situations in Which Transparency Is a Bug, Not a Feature? 223
Chapter 31: The Role of the Employer 225
What Is in All This for the Employer? 227
Chapter 32: The Bureaucratization of Capital 231
Chapter 33: Coda 233
What is Retirement? 233
The Way Forward 234
Index 237
