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Pension Troubles, Part Three
The Employer said, "To fix this problem we need to organize a committee, have meetings, and through process of continuous improvement, develop a solution."
The Fund Manager said, "No that would take too long, besides that method never worked before. I have my trusty pen knife here and will take apart the brake system, isolate the problem and correct it."
The Congressional Member said, "I think your both wrong! I think we should all push the car back up the hill and see if it happens again."
The car these three were driving is your pension. And although the fiduciary responsibility of those in charge of your pension has been in question before, nothing like the proposed postponement of a serious problem such as recalculating funding has had such long range consequences. The problem is nothing new. Some issue or another about funding has cropped up rather regularly for the last twenty years. But the far flung effects of the current piece of legislation headed for the President's desk, is, well, unprecedented.
Congress, for those who may not be aware, took over the job of watchdog of these defined benefit pension plans back in the 1974 with the Employee Retirement Income Security Act. The act itself was well intentioned but it has since been tweaked beyond recognition. A defined-benefit pension plan is basically provides an increased benefit for older workers, adding real value to the last ten years of employment. From an employer standpoint, the company funds the plan, putting up all the money. The worker, who views that money as more than a hollow promise of future benefits believe that their pensions are their property.
These plans have come under fire recently because of heavy gambles in the stock market which proved to be too aggressive. Companies and unions take the contributions made on behalf of their employees and members and invest them. There is a delicate balance between overfunding and underfunding which, when added to the ever growing pool of retired and soon-to-be retired workers, complicates the investment strategies of these plans. Too conservative and the plans will not have enough available cash for retirees. Too aggressive and the plan runs the risk of underfunding should the markets turn sour. Congress has understood this all too well as they have tried their hand at fixing the problem by making these subtle adjustments six times over the last thirty years, raising taxes three times.
The problem with a company sponsored plan is the inherent conflict of interest they pose, especially in years when the markets are flush with stock gains. Skimming those overfunded plans were used for profit fixes for struggling enterprises which in turn creates a problem in years when those investments fail to perform.
Fund managers proved to the world that they too were victims of human nature. As the markets slid, they, like many of us, sold stocks at low prices and in doing so missed a good deal of the upside rebounds in recent markets. This left far too many plans without a financial leg to stand on.
So, in steps Congress once again. The Pension Funding Equity Act passed by the House late last year, which I might add received administration approval, was tweaked by the Senate in such a way that the name of the Act itself becomes a misnomer. The change came in the way these plans were calculated. This, it turns out, provides little in the way of relief for many of these plans.
These calculations are currently based on the 30-year Treasury bond rate. Using this ultra conservative index meant that many plans were underfunded. By changing the indexed rate to follow the higher, and more volatile corporate rate, companies will be able to assume better funding even if it doesn't really exist. And it seems that no member of Congress can explain how removing money from a plan, to the tune of $25 billion (an estimate based on the last temporary law) or $80 billion (based on the old law) would make the plan better.
The likely and regrettable solution will be eliminating these types of plans altogether. Turning defined-benefit plans into defined contribution plans makes sense but has ill-fated consequences for employees who are at or near retirement. Changes in the plans at this late stage in a working career would change more than one retiree's benefit. Touting defined contribution plans as portable; suggesting that all workers would take the time to educate themselves; and assuming that fiduciary responsibility would suddenly blossom among employers eager to see that their employees investment strategies met with their goals will not happen. Evidence of this lack of understanding is rampant among the investments currently being used by lower wage workers who have a 401(k) plan available. Too often, they either contribute nothing or fail to make good long term decisions when they do pick an investment. That's not to say that education won't work, but right now, it has failed for too many current users of defined contribution plans. That will only leave another future burden on the horizon.
Employers should be forbidden to default on their current plans, possibly even closing them to future members until something can be worked out. But the current legislation, despite the threat of veto (which hasn't happened in the last three years and is unlikely to happen now), is a travesty of fiduciary responsibility. Somehow, when industry and Congress join hands, it is often the average worker who ends up paying the price. This time, the price will paid long after these "leaders" have left.
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