Art Dadu Shin
Retirement plan advisers are used to hearing that 401(k)
plans are not working. Politicians, some academics and many Americans have been
referring to the 401(k) plan as a “failed experiment.” They recognize American
workers’ inability to properly and sufficiently save for retirement. Critics
have been telling retirement plan advisers that the 401(k) needs to start
looking and functioning more like a traditional defined benefit (DB) plan.
Perhaps they are right, perhaps not.
Critics have been clamoring about the failed experiment for
more than 10 years. The second half of 2014 is an excellent time to take stock
of the alternative retirement choices that plans are offering the American work
force. Not everyone will appreciate the mosaic that becomes a bit clearer. The
first seven business days of July—the time of this writing—were tumultuous for
tax-qualified retirement plans. More than glancing blows were delivered to
defined benefit plan structures, investors, trustees, fiduciaries, participants
and the Pension Benefit Guaranty Corp. (PBGC). About the only entity left
unscathed during those days was the 401(k) participant.
The Supreme Court recently issued an unprecedented opinion
involving employee stock ownership plans (ESOPs) and their plan
fiduciaries/committees. These are not pension plans in the defined benefit
parlance, but tax-qualified plans where many participants save in a structure
that enables them to amass retirement funds for use after separating from
In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751,
the Supreme Court found that ESOP fiduciaries are not entitled to a presumption
of prudence in connection with buy, sell and hold decisions when dealing in
employer securities under the Employee Retirement Income Security Act (ERISA).
(The ESOP Association estimates that there are approximately 10,000 ESOP
structures in place in the U.S., covering roughly 10.3 million employees.) The
ruling is certain to garner the attention of many C-suite fiduciaries who serve
on ESOP committees.
The PBGC communicates that enough is enough by announcing a
moratorium on the enforcement of 4062(e) regulation cases through December 31.
PBGC Director Josh Gotbaum, who is stepping down from his post in August, said,
“The PBGC’s mission is to preserve pensions and jobs.”
During June, business leaders and benefits professionals
communicated to regulators that the PBGC’s enforcement policies were impeding
business planning and negatively affecting pension participants. Time will tell
if this moratorium will improve outcomes for plan participants and sponsoring
City of Detroit Update
Bondholders who own the debt of the city of
Detroit—limited-tax general obligation (G.O.) bonds—are gearing up to receive
34 cents on the dollar for those positions. Bondholders are not happy with
either a cents-on-the dollar payout or the threat of a full bankruptcy
proceeding. Individuals in other cities that face bankruptcy should follow this
story. Detroit’s General Fund and Police and Fire Fund pensioners are likely to
receive between 16 and 64 cents on the dollar—depending upon the actual value
of the art being sold at the Detroit Institute of Art and other asset sales.
Back to the 401(k) Plan
For all of the 401(k) plan’s warts, for all of the naysayers
of employee-funded savings, and for everyone who looks at the 401(k) plan as the
failed experiment—compared with the traditional defined benefit plan—401(k)s
experienced a good week!
Over that first week of July, no billion-dollar scandals
surfaced with cents-on-the-dollar settlements by investors and participants. It
was just business as usual: Millions of Americans worked hard for their
families and their futures, and saved a portion of their compensation in a
tax-qualified structure—where they can be reasonably certain that the funds
will be matched at some pre-set percentage, plus investment earnings.
During a period where “pensions gone wild” was the norm, the
so-called failed experiment of the 401(k) plodded along as designed, and
delivered exactly what was expected. This is the plan that “supplements” all
other assets, wealth and savings; it is the plan that individuals can
contribute to, invest in, depend upon and access based on their own decisions,
free from the clutches of the U.S. government or social system.
Steff C. Chalk is CEO of Fiduciary Consulting and Governance
Group Inc., a fee-only fiduciary consulting practice serving corporations and
nonprofits. A judge for the PLANSPONSOR Retirement Plan Adviser of the Year
award and a faculty member of the PLANSPONSOR Institute, he is also co-author
of “How to Build a Successful 401(k) and Retirement Plan Advisory Business.”