401(k) Plan Alternatives

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.

ESOP Update

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 service.

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.

PBGC Update

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 organizations.

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.