The plan must be account-based. Account-based plans provide
transparency—assets equal liabilities—and do not create interest-rate risk.
The plan should provide for employer/employee sharing of
contributions. Matching contributions, which only exacerbate the disparity
between savers and nonsavers, should not be allowed (please see my last column,
March, page 78). Because of this, employer contributions toward retirement
savings, if any, would go to all employees.
The plan should provide for automatic enrollment/automatic
increase of employee contributions.
We should scrap the nondiscrimination system and substitute
a combination of tax deductions and tax credits. Specifically: 1) keep 410(b),
so the plan would have to cover a broad cross section of employees; 2) all
employee contributions generate a refundable tax credit equal to the highest
marginal rate (this will be expensive, so contribution limits will have to be
low); 3) contribution limits increase in relation to the participant’s age; and
4) employer contributions operate on a “deduction” basis, meaning no tax credit
is generated.
The plan should provide for employer/employee sharing of
investment risk—generally, the account would be credited with trust returns
subject to an annual floor/cap. The employer would, in effect, take the “tail”
risks. As we saw in 2008, one-year losses can devastate individual employees.
The employer has a much longer time horizon and, typically, access to hedging
strategies unavailable to employees.
The plan should also provide for payment of a lump sum with
a mandatory deferred annuity “kicker,” for example, one that begins at age 85.
Thus, the natural employer-based mortality risk pool could be used, rather than
forcing the participant to buy an expensive retail, insurance-company-provided
annuity.
The analysis underlying this proposal is complicated and can
only be sketched here. The significance of interest rate risk to employers
versus employees would, for instance, take a couple of columns to treat
adequately. As would a discussion of why requiring the employer to take a
portion of plan asset performance risk is a “win/win” (net gain to the system),
and of how such an approach would be implemented.
I offer this alternative not as a master solution but as a
way to encourage more flexible thinking about the problems we face.
Michael Barry is president of the Plan Advisory Services
group, a consulting group that helps financial services corporations with the
regulatory issues facing their plan sponsor clients. He has 30 years of
experience in the benefits field, law and consulting firms.