The End in Mind

Having spent three days immersed in PLANSPONSOR’s second annual DB Summit, I was struck by just how relatively “easy” participant-directed plans—be they 401(k), 403(b), or 457- are.

Now, I hope you picked up on the use of the word “relatively.” I wouldn’t suggest for a minute that participant-directed programs don’t have their challenges. If the concept of saving is simple enough, the science of investing, compounding, and tax-deferral presents daunting intellectual obstacles for many. Even expert practitioners struggle with notions of “reasonable” fees, appropriate glide paths for target-date funds, and the applicability of QDIA regulations in the “real world.”

Over the years, our industry has worked to make participant-directed programs more accessible to participants. More recently, we have accommodated those who don’t want that access (for whatever reason)—or those who prefer to hire experts (or both)—with an assortment of automatic plan design features.

Meanwhile, IMHO, defined benefit designs have gotten more complex. Ironically, alongside the very Pension Protection Act provisions that have yielded such clarity to future defined contribution designs, we have managed, in a number of key areas, to take already convoluted calculations, turn them on their head, and introduce several new variables (several of which are, just weeks ahead of their implementation, still undefined)—all on results that must now sit up high and prominently on corporate accounting statements.

If their design is complicated, there is nonetheless a remarkable clarity of purpose to defined benefit pension plans, IMHO, and one need look no further than their name. The purpose of those traditional pension plans is imbedded in their very name—“defined benefit.” By design, plan sponsors need to project the ultimate benefit to be paid—and then figure out a way to pay for that. They need to consider how long people will live and what their pay will be in the distant future, project potential investment returns, consider the interest rate environment, and how much money has already been put aside for that purpose. Defined contribution plans, on the other hand, define only the amount(s) being contributed, not that ultimate benefit. And yet, by near-unanimous acclamation, the “results” of these programs—the benefits they provide—will define the financial security of our retirement.

Much of the impetus for the enactment of the PPA—and in no small part, many of the potentially draconian funding and reporting requirements contained therein—was the product of concerns that the benefits promised were not being adequately funded, and that, ultimately, those commitments would be “dumped” on the federal government (in the form of the nation’s private pension insurer, the Pension Benefit Guaranty Corporation (PBGC). Those PPA-imposed strictures, in turn, have led a growing number of employers (though by no means as many as the headlines would lead one to believe) to rethink those commitments.

One can only wonder what might happen if we were to impose on individual workers and their defined contribution plans what we have already imposed on those defined benefit programs…a funding requirement sufficient to provide a promised benefit, rather than simply restricting how much money can be contributed to these programs.

What if we began—with the end in mind?

- Nevin E. Adams, JD