December 5, 2006 (PLANSPONSOR.com) - The nation's
private-sector defined benefit pension insurer announced
Tuesday the maximum annual benefit for participants in plans
terminating in 2007 is $49,500 for those retiring at age
65.
That represents a 3.87% or $1,844 increase over the
$47,659 maximum paid by the Pension Benefit Guaranty
Corporation (PBGC) to those retiring at age 65 from plans
terminating in 2006.
A PBGC news release
said the amount is higher for those who retire
later and lower for those who retire earlier or elect
survivor benefits. If a pension plan terminates in 2007,
but a participant does not begin collecting benefits
until a future year, the 2007 maximum insurance limits
still apply, the agency said.
According to the PBGC, two additional legal limits on
PBGC’s insurance coverage can also affect
participants’ benefits:
The first prohibits the PBGC from guaranteeing
benefits that exceed the amount payable at the
plan’s normal retirement age.
The second limits PBGC’s guarantee of
benefit increases made within the five years prior to
plan termination.
More than 90% of the participants in plans taken
over by the agency face no reduction in benefits due to
the legal limits on coverage, PBGC research shows. The
largest reductions occur in cases where participants earn
pensions that significantly exceed the maximum insurance
benefit or provide generous early retirement subsidies.
Under the PBGC’s single-employer insurance program,
retirees sometimes can receive more than the maximum
guaranteed benefit. In general, three conditions must
apply:
the participant earned a benefit in excess of
the maximum guaranteed amount;
the participant retired or was eligible to
retire three years prior to plan termination;
and
the plan had sufficient assets to pay benefits
above the guaranteed amount.
The latest – a report from the Government
Accountability Office (GAO) at the behest of Congressman
George Miller (D-California) – painted a relatively bleak
picture of both the impact of fees on retirement
savings,
and on the ability of plan participants (not to
mention plan sponsors and government regulators) to discern
what they are paying for.
Before the week was out, the Investment Company Institute
(ICI) had published a report with a similar focus – but
with a much different conclusion.
For the most part, the GAO report didn’t plow any
new ground.
In fact, IMHO, any self-respecting retirement plan
professional could have written the report (or at least
bulleted its conclusions) in their sleep.
The bottom line: Fees can have a huge impact on retirement
savings, but few seem to know what fees they are paying,
and they have to work hard to know what little they do
know.
In contrast, the ICI report conveyed the kind of calm,
reassuring perspective on mutual fund investment by 401(k)
plans that one would expect from the mutual fund
industry’s chief lobbying group.
But I would sum it up as follows: Compared with retail
mutual fund investors, 401(k) plan participants are getting
a good deal.
Plan fiduciaries are, of course, charged with
ensuring that both the fees AND THE SERVICES PROVIDED
(emphasis mine) are reasonable.
I know of no way to fulfill that obligation without
a complete understanding of the services you are receiving,
and the price you are paying for them.
Unfortunately, we live in a world where the vast majority
of fees paid by retirement plan participants are funded
from a single fee source – the imbedded expense ratios of
mutual funds.
At some level, most of us can, with at least some effort,
as the GAO report notes, know how much we are paying.
And, with the assistance and complicity of providers and
fund complexes, we can – again, with some effort – discern
how much money is going to whom, and for what purpose(s).
Fees, like death and taxes, are a given in the world
of retirement plan savings (believe if or not, one of the
“key findings” in the ICI report was this little
factoid:
“Employers offering 401(k) plans typically hire
service providers to operate these plans, and these
providers charge fees for their services”).
Furthermore, despite a growing interest in, and awareness
of, the need for transparency in such matters, we still
seem to be a long way from the solution – perhaps even in
terms of deciding what the problem is that we are trying to
solve.
I would suggest that we’re trying to make sure that
relatively unsophisticated participants aren’t being ripped
off by a system that has been afforded certain privileges
to, at least ostensibly, help them.
Secondly, we’re trying to arm and/or inform those
charged with overseeing those programs – plan sponsors,
advisers, and yes, even regulators – with the information
they need to provide effective oversight.
Finally – and while this goal is perhaps less explicit, it
seems most important – I believe we are finally creeping up
on the ability to articulate what the “right” answer is
when it comes to determining what is “reasonable.”
It’s not likely to be easy, however.
Consider that one of the tools referenced in the GAO
report was the Department of Labor’s Fee Disclosure Form,
and you need look no further than this multi-page template
to gain a sense for the challenge confronting this effort –
not just to identify the charges, but to understand their
applicability to an individual plan – and to be able to
compare them against competing platforms and fee
structures.
It will take more than mere transparency to get
there, of course, but we’ll never know if they are
reasonable if we don’t know what those fees are in the
first place.
It’s the difference between an assurance that fees
are reasonable – and having reasonable doubts.
Editor's Note:
Some interesting excerpts from the GAO report:
In fiscal year 2005, Labor received only 10
inquiries or complaints related to 401(k)
fees.
Labor officials told us that it is difficult to
discern whether a fee is reasonable or not on its
face, and therefore, investigators rarely initiate an
investigation into a fee's reasonableness.
Labor's most recent in-depth review of fees
identified some plans with high fees but determined
that they were not unreasonable or in violation of
ERISA.
In some cases, Labor did determine that
participants were paying high fees. It referred these
cases—which included insurance products and
international equity funds—to a fee expert from
academia for further analysis to determine if the
fees were unreasonably high. The expert determined
that the fees were high, but not unreasonable.