Thursday, March 31, 2011

Insuring Our Retirements

A great many of you already know what the Pension Benefit Guaranty Corporation is and what it does. The PBGC basically insures pensions and uses the premiums paid to it by employers to guarantee that no matter what happens to the pension an employer might have, the benefit (referred to as a defined benefit plan) will be there, perhaps in total, when the worker retires. This organization was born out the need to protect workers from company defaults, mergers and acquisitions and other business practices that essentially took a lifetime of retirement income away.

The PBGC is a government agency that does not rely on tax revenues to conduct its business. According to their site, the explain how they pay for what they do as: "financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans." There a limits to how much you can collect if the PBGC steps in and takes over your pension (such as a limit of $4500 a month) but the benefit far outweighs the total loss of your plan.

Now there is a movement in Washington, spurred on by the Government Accounting Office (GAO) to create a similar type program for those who have 401(k)s. If we have learned anything since these defined contribution plans made their debut 30 years ago is that they are still under-used and those who do use them, are still unsure what they are doing. Even as the predictions of these plans growing in the coming years by a third by 2015, this doesn't necessarily mean that the plans have improved or the still-as-yet-to-embrace the plan participants will do a better job funding and/or planning for their future on their own.

The hearings center around the introduction of some sort of insurance, much like the insurance the PBGC offers to pensions, for 401(k)s or what banks offer as deposit insurance (FDIC). The GAO is pushing for such protections and the plan sponsors are pushing back, suggesting that the efforts they have made in education and plan improvements are enough of a guarantee.

The current set-up of these 401(k) plans is still, as one participant in the hearings suggested, too murky with too much leeway given to the plan sponsor, too little transparency into how those underlying investments are chosen and whether they are the right fit for all plan participants. Robert Reynolds, president and chief executive officer of Putnam Investments stepped into the fray with his suggestion of something similar to the FDIC involvement with bank deposits.

Mr. Reynolds called on Congress to create a new Lifetime Income Security Agency. In a speech given at the 2011 Retirement Income Industry Association, Reynolds outlined the need for this sort of protection. He suggested: "As the oldest Baby Boomers reach the traditional retirement age of 65, we need to go beyond helping Americans accumulate assets for retirement to helping them draw those assets down to provide reliable income throughout retirements that could last 20 to 30 years or more. It’s even more challenging to draw assets down sustainably as it was to accumulate them in the first place,”

Subjecting these plans to rigorous standards would allow for the denial or approval of products such as annuities in these plans designed to guarantee income for these retirement investors, market downturns or not. He believes that this sort of insured confidence would spur more people to embrace the plans and give those who currently use them additional incentive to increase their participation. The restrictions put in place by the 1986 reform measures passed by Congress did more harm than good.

Reynolds believes: "With Baby Boomers now in or approaching retirement, the stakes are much higher now than they were 25 years ago." That change is needed and needed now. By creating some sort of protection, he suggests a domino effect that would begin with "encouraging savings that fuels investment, business formation and job creation."  Any focus on the deficits without a focus on increasing personal and workplace savings would be misdirected and he suggested that "Congress should dismiss such ideas out of hand."

Auto-enrollment, savings escalation and guidance to wise asset allocation improved the current state of 401(k) participation but did not go far enough. These provisions in the Pension Protection Act of 2006 did not include workers without access to traditional employer sponsored plans. Reynolds suggested that some sort of auto-enrollment into IRAs woud be a good first step. But guarantees would be far better and instill a sense of future promise and retirement income safety where, for many Americans, there is little or none.

Paul Petillo is the managing editor of and a fellow Boomer

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