Nevin's Data "Points"

  I’m not sure how old I was when I first saw “Night of the Living Dead”—but I have long been intrigued by stories of a zombie apocalypse—where mindless beings inexplicably rise from the dead, with no memory of their past, just a relentless (and apparently insatiable) hunger for…well, “us.” That is perhaps an unfortunate comparison to  last week’s hearing  by the Senate Health, Education, Labor and Pensions (HELP) Committee, one ostensibly held to focus on how we were going to stave off the retirement “crisis” by…bringing “back” [i]  defined benefit plans. [ii] There were two fundamental premises underlying the hearing; first that there is, in fact, a retirement crisis, and second, that the restoration of defined benefit plan designs would remedy that situation.  There remains in many circles (including last week’s hearing) a pervasive sense that the defined contribution system is inferior to the defined benefit approach—a sense that seems driven not by what the...

A week or so ago, I came across an announcement that IBM was making changes to its 401(k). More specifically that, effective next year they were going to replace their matching contribution in their 401(k) with an employer contribution to a cash balance plan. [i] In the days that followed, the news was picked up in a couple of different trade publications—the implication being that this might be signs of a new shift in plan design. Heck, even Teresa Ghilarducci weighed in , championing the “evolution” to a defined benefit structure from the “flawed” 401(k). She never misses an “opportunity.” Readers here are likely familiar with the basic concepts of a cash balance design. Technically a defined benefit plan, it’s generally referred to as a “hybrid” because it also has a number of participant-friendly aspects that it shares with a defined contribution plan, notably an account balance (though it’s a “notional” one) that is shared with participants. The benefits accumulate ...

The 2017 media-bashing of the 401(k) is off to an early start. The most recent is a Wall Street Journal article (subscription required) whose headline notes that “The Champions 1 of the 401(k) Lament the Revolution They Started” (the third-most read article on the WSJ site as I write this). It’s fair to say, I think, that their regrets aren’t so much about the 401(k) itself, but their sense that the existence of the 401(k) – which transformed the notion of retirement savings in so-called savings and thrift plans by allowing regular workers to defer paying taxes on money they set aside for retirement – led to the demise of the traditional defined benefit plan. Well, maybe. Trust me, I “get” the affection for the promise of a DB plan. Who wouldn’t like a plan that is funded (and paid for) by your employer, invested by your employer, and at retirement, produces regular, predictable distributions without you having to do anything except making sure they know where to send the ch...

I recently stumbled across another of those “DC plans are becoming like DB plans” articles — you know, the so-called “DB-ification” of 401(k)s? This is all supposed to be a good thing, of course, but is it? We are, of course, routinely told that defined benefit plans do (or did) a better job of providing adequate income in retirement than defined contribution plans — though we aren’t generally reminded that that assumes that workers have actually managed to accumulate service credits sufficient to vest in those benefits, and that those programs are properly funded. However, this interest in emulation of DB plans by DC plans is a relatively recent focus, fueled in no small part by the success of Pension Protection Act-engendered trends, primarily auto-enrollment (after all, nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (ditto on asking participants to choose the investments in the DB plan). But while it’s said that imitation...

A frequent criticism of the 401(k) design is that it was “never designed” to provide a full retirement benefit, unlike, as it’s often stated or implied, the defined benefit plan. Moreover, while there is a very real tendency to focus on the CURRENT balance[i] in a defined contribution/401(k) plan and treat that as the ultimate outcome, for reasons I’ve never really been able to understand, people tend to think and talk about defined benefit (DB) plans in terms of the benefit they are capable of providing, rather than the actual benefits paid. However, the data show that some of the common assumptions about defined benefit pensions are out of line with the realities, including: Once upon a time, everybody had a pension. “Coverage” is a hot topic among policymakers these days, or more accurately, the lack of it. One of the most frequently invoked criticisms of the current system is that so many American workers don’t have access to a retirement plan at work. But in 1979, only...

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else. My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had beco...

Behavioral finance drives much of the discussion around retirement plan design innovations these days, for the very simple reason that it seems to help explain what might otherwise be viewed as irrational behaviors. For example, human beings are prone to something that behaviorists call “confirmation bias,” a tendency to favor information that confirms what we already believe. While doing so generally contributes to quicker assessments of information, there are some obvious shortcomings to that approach in terms of critically evaluating new information, particularly information that contradicts what we have already chosen (rightly or wrongly) to accept as reality. Last month EBRI published an analysis of a direct comparison of the likely benefits under specific types of 401(k) plans and defined benefit (DB) pension plans.(1) As anyone who has worked with employment-based retirement plans knows, individual participant outcomes can vary widely based on a complex combination of decisio...

It has become something of a truism in our industry that defined benefit plans are “better” than defined contribution plans. We’re told that returns are higher(1) and fees lower in the former, that employees are better served by having the investment decisions made by professionals, and that many individuals don’t save enough on their own to provide the level of retirement income that they could expect from a defined benefit pension plan. Even the recent (arguably positive) changes in defined contribution design—automatic enrollment, qualified default investment alternatives, and the expanding availability of retirement income options(2)—are often said to represent the “DB-ification” of DC plans. However, a recent analysis by EBRI reveals that DB is not always “better,” at least not defined as providing financial resources in retirement. In fact, if historical rates of return are assumed, as well as annuity purchase prices reflecting average bond rates over the last 27 years, the me...

Sooner or later as a parent you’ll be told—as you doubtless you told YOUR parents—that “that’s not the way things are now!” It’s a potent retort to whatever social more is at issue because, whether it involves a choice in dress, curfew, or even resumé preparation, our perspectives are often shaped (and sometimes distorted) by our recollection of the way things were for us at comparable points in time. Or, as we must sometimes admit, “the way things used to be.” When it comes to things like working careers, there is a widespread assumption that past generations worked for a single employer for all, or most of his/her working years, and then retired with a pension and a gold watch. In contrast, current American workers are believed to change jobs (much) more frequently. In fact, many champion the defined contribution plan design as a better “fit” for today’s workforce, which—certainly in the private sector—is seen as lacking the kind of tenure necessary to accrue sufficient benefits un...

There’s been a lot of talk lately about the need to fix the “broken” 401(k) plan.   Some say it disproportionately benefits higher-paid workers, some claim it can’t provide a level of retirement income sufficient to meet lower-income needs, and still others maintain it can’t provide that level of security for anyone .   And, as often as not, those sentiments arise as part of a discussion where folks wistfully talk about the “good old days” when everybody had a defined benefit pension, and people didn’t have to worry about saving for retirement.   Only problem is—those “good old days” never really existed, nor were they as good as we “remember” them. Consider that only a quarter of those age 65 or older had pension income in 1975, the year after ERISA was signed into law.   The highest level ever was the early 1990s, when fewer than   4 in 10 (both public- and private-sector workers) reported pension income, according to EBRI tabulations of the 1976–2011 Cu...

Thousands of protestors took to the streets this past week—in Wisconsin. They were protesting legislation that would restrict the scope of collective bargaining power, while at the same time requiring public-sector workers to pay more for their pensions and health care. Last week, reportedly 40% of Madison, Wisconsin, schoolteachers called in sick (ostensibly they were in attendance at the state capital, and by appearances bringing some of the student body with them). The protestors (at least the ones on camera) drew comparisons to their actions with those taken recently by those in Egypt protesting for freedom and a democratic system of government. But to my eyes, it looked more like Greece. Don’t get me wrong. The Wisconsin protests were boisterous but appeared to be peaceful, and I’ve heard no reports of the kind of violence and arson that accompanied the protests in Greece a year ago (see Grecian Formula ). But in Wisconsin, as in Greece, a big issue is pensions and benefits 1 ...

That report, published by Towers Watson (see “ Towers Watson Finds DB Plans Outperformed DC Plans ” at ), compared the differences in investment results between 401(k) plans and defined benefit (DB) plans—and, in a contest that you’d surely have trouble getting decent odds on in Vegas, defined benefit plans fared better. That shouldn’t—and probably didn’t—surprise anyone, IMHO. Defined benefit plans have a lot of things going for them that 401(k)s don’t. First, most DB plans have someone in an official capacity paying attention to them. They are obligations of the employer, after all, and they have a direct—and increasingly visible—impact on the bottom line. Second, in view of the first consideration, those responsible for that bottom line impact of the DB plan generally have the good sense to engage the services of experts to help them make the right decisions. Finally, and perhaps most importantly when it comes to making investment decisions, DB plans have the benefit of time—an...