Public Policy, Individual Action

TIAA-CREF’s president and CEO on how to stop the retirement crisis before it starts. 

Can public policy and the private sector come together to build a better retirement for American workers?

As part of the CEO Speaker Series from the Council on Foreign Relations, Roger W. Ferguson Jr., President and CEO of TIAA-CREF, responded to questions about the adequacy of the retirement system today. For one thing, within the next 20 years, the Trustees expect that Social Security will be unable to cover roughly 25% of expected payouts.

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“The good news is most economists would share a consensus about how to fix Social Security,” Ferguson said. The bad news: “Our politicians are having trouble reaching that consensus.”

Understandably, he added, most Americans are concerned they will not have sufficient savings to cover their needs in retirement. “Private savings have been too low for too long,” he said, and though it is a longer-term problem, the solution is easier said than done. “We, as individuals, have to fix what we can.” Workers of all ages need to save more, and those who are able should prepare themselves for a longer career than they might have anticipated.

For physical laborers, that may not be possible. Social Security, Medicare and Medicaid were designed to help keep the aging population above the poverty line. The primary goal of the retirement industry, he argued, should be to shore up those programs, to protect American workers from falling below the line as they age. “This is about long-term, intergenerational risk management.” That answer may be unsatisfactory to some, he said, but we, as an industry, need to focus on fixing what we can.

There are retirement systems in place that Ferguson believes are a good fit for American workers. A strong model is one that uses automatic enrollment to get people into the plan, that couples employee deferrals with an employer match, and that accumulates savings for both a fixed and a variable annuity. The first guarantees income for life, and the second can provide an inflation hedge.

NEXT: Are there enough incentives and policies in place to encourage savings?

The benefit of being able to save tax-deferred is good, Ferguson said. As to whether it is enough, he believes that success comes down to a combination of public policy and private action. Many people are not deferring much income to their savings, even with the incentives already in place.

The current economic climate makes it unlikely that further policies will be put in place to push private savings, he noted. “I suspect, over time, we aren’t going to get more in the way of incentives to save. It’s up to all of us to leverage fully what we have.”

While he argued there is no optimal relationship between the government and private sector, the appropriate balance is cyclical, and depends upon market fluctuations. “Economics tells us that governments do and should rise when there’s a ‘pure public good’ kind of problem,” and this holds true whether the issue is defense or Social Security. One way to think about it, he suggested, is that the government can set the rules for how transactions among external factors should take place.

Though it is controversial, he admitted, “We need, often, a big government back-stop when things really get out of kilter.” The level of government regulation in place may rise with market instability, but should also be expected to fall as conditions return to normal.

Globally, he said, “there are pockets of strength.” Australia’s superannuation system, for example, requires that everyone save a certain amount and that they save in a way that allows them to have annuities.

NEXT: Changing retirement plans. 

The nature of retirement planning products themselves should also evolve, Ferguson said. Financial literacy is too low to ask participants to make decisions that are in their own best interests, and many people need advice and guidance when it comes to retirement planning. Auto-enrollment and -escalation can address some of that, but the misconception that many participants have that their target-date fund (TDF) provides guaranteed income in retirement also needs correction. Even participants who are very happy in their 401(k)—and many employees do appreciate the employer-sponsored benefit, he said—regret that there is not more support for decumulation.

“We all have an interest in making sure that compensation systems are structures with the right set of incentives,” he said. “The real secret is that long-term investors and management have an alignment of interests around getting really smart strategies well-executed over a reasonable period of time.” For plan sponsors, having a goal for the plan in place can lead to a better-informed strategy and benefit plan overall. The benchmarks for plan success are unique to each program, but the plan design should provide a roadmap for meeting those targets.

The focus of many plans is on the savings process and accumulating assets, not the payout that should come at retirement. The second question—What will your account balance look like when it comes time to draw it down?—is largely ignored by the products currently available. “Think of retirement as a shared responsibility between employer and employee.”

Ferguson suggested that a successful program would combine the best aspects of defined contribution (DC) and defined benefit (DB) plans. Demand more from savers, then provide a payout at retirement; the challenge is doing that sustainably for participants. 

4th Circuit Revives Case Over Transfers to Cash Balance Plan

The appellate court found that Bank of America’s closing agreement with the IRS did not make the case moot.

The 4th U.S. Circuit Court of Appeals has determined that participants in Bank of America’s cash balance plan still have a claim for relief for illegal transfers of their 401(k) account balances to the cash balance plan.

The appellate court first determined that the plaintiffs had standing to sue under Employee Retirement Income Security Act (ERISA) Section 502(a)(3), which provides that a plan beneficiary may obtain “appropriate equitable relief” to redress “any act or practice which violates” ERISA provisions contained in a certain subchapter of the United States Code. The court found that the transfers violated ERISA’s anti-cutback provisions, as determined by the Internal Revenue Service (IRS) during a plan audit, and that the relief the plaintiffs are seeking—the profits Bank of America made from the assets transferred—is “appropriate equitable relief.”

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The 4th Circuit noted that the U.S. Supreme Court found that “[a] case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” The court said, “If an accounting ultimately shows that the bank retained no profit, the case may well then become moot.  But as long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot.” 

Finally, the court determined that the statute of limitations of 10 years under North Carolina trust law applied in the case. The first of the transfers in question took place in 1998, and the plaintiffs filed suit in 2004, so their claims are not time-barred by the applicable statute of limitations.

NEXT: Case background.

In 1998, NationsBank amended its 401(k) plan to give eligible participants a one-time opportunity to transfer their account balances to its defined benefit cash balance plan. The cash balance plan allowed participants to select investment options, but they were purely notional, and participants were credited with what their accounts would have received if invested in those options. The bank invested plan assets in investments of its choosing, and if those investments earned more than the return applied to participants’ accounts, the bank kept the difference.

The plaintiffs filed their lawsuit in 2004, seeking to obtain the profits the bank was keeping. In 2005, after an audit of the bank’s plan, the IRS issued a technical advice memorandum, in which it concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated Internal Revenue Code § 411(d)(6) and Treasury Regulation § 1-411(d)-4, Q&A-3(a)(2). According to the IRS, the transfers impermissibly eliminated the 401(k) plan participants’ “separate account feature,” meaning that participants were no longer being credited with the actual gains and losses “generated by funds contributed on the participant[s’] behalf.”

The IRS determination led a federal district court to move the participants’ case forward. However, the bank entered into a closing agreement with the IRS, paying a $10 million fine and setting up a special-purpose 401(k) plan to restore participants’ accounts. The district court determined that, following the closing agreement, the participants no longer had standing to sue.

The appellate court reversed the district court’s decision and remanded the case for further proceedings.

The opinion in Pender v. Bank of America Corporation is here.

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