Retirement Savings Policy

Mike brings to this work his comprehensive experience and consummate technical talent in a beautifully readable book. A treasure.

--Frank Cummings, Former Adjunct Lecturer in Law at UVA Law School, Columbia Law School, NYU Law School, and ALI-ABA

Retirement Savings Policy reviews the basic policies that govern retirement savings plans, and their real world application, focusing on the key issues of finance, taxation, fiduciary conduct, and employee choice. The discussion is framed around the three fundamental challenges confronting employers and employees today - the pension legacy, the 401(k) revolution, and the pressure, from policymakers, regulators, opinion leaders, and individuals, for changes that will put retirement security within reach of all Americans.

With more than 40 years' experience in the field, Michael P. Barry provides both a wealth of practical detail - best practices and concrete solutions - and a broad framework for understanding the issues surrounding retirement plans and strategies. The result is a comprehensive introduction to the forces that drive sponsor, participant, and policymaker decision-making.

This is the perfect book for benefits and financial professionals who want a better understanding of the basic rules that govern retirement plan administration but also serves those interested in truly understanding the nuances and issues surrounding retirement plans and policies. The approach is practical, focusing on how US retirement plans actually work, how they are taxed (and not taxed), how they are regulated.

But it is also conceptual, devoting considerable attention to an understanding of why these plans work the way they do. Why regulators and policymakers are so focused on a handful of issues - expanding coverage, reducing fees, fairness. And, at the highest level, what are the problems that we are trying to solve. As such, much of what we discuss will be of interest to a more general reader, who wants a realistic understanding of what is really at stake in current retirement policy debates.

Auteur

Michael P. Barry is President of O3 Plan Advisory Services LLC, which provides retirement plan regulatory analysis targeted at plan sponsors and those who provide services to them. Before founding Plan Advisory Services in 1998, Mike was Managing Director at Bankers Trust and, before that, practiced law in Washington D.C. and New York. Mike writes a regular column for PLANSPONSOR Online - "Barry's Pickings."

Contenu

Part I: The Defined Benefit Plan Legacy 1

Chapter 1: An Overview of Existing Plans 3

Chapter 2: DB Plan Basics 7

A Formula Benefit 7

Where All the Risk Is Borne by the Sponsor 9

The Three Risks of Retirement Savings 9

Chapter 3: The DB Valuation Challenge 13

The Challenge 13

The "Time Value of Money" 14

Going Concern-The Portfolio Rate of Return Option 17

Chapter 4: The Regulatory Framework-Benefit Insurance, Minimum Funding

Rules and Accounting Standards Affecting DB Plan Finance 21

The Pension Benefit Guaranty Corporation 22

The Pension Protection Act of 2006 22

Plan A: Tighten the Minimum Funding Rules 23

Plan B: Relax Minimum Funding Standards and Increase PBGC Premiums 24

The Current Minimum Funding Regime 25

The Current PBGC Premium Regime 26

The Accounting Regime, Very Briefly 27

How DB Liabilities Are Valued for Financial Statement Purposes 28

Chapter 5: The Regulatory Framework-Minimum Standards for Retirement Plan

Design and Tax Code Nondiscrimination Rules 31

Minimum Standards 31

Spousal Rights-the Retirement Equity Act of 1984 33

Tax Code Nondiscrimination Rules 34

Tax Code Limits on Benefits, Contributions, and Compensation 34

Chapter 6: Problems with the DB Design 37

Issues with DB Design 37

The Inadequacy of Pre-Retirement Income as an Index of Post-Retirement

Needs 37

The Inadequacy of a Flat Retirement Income Target 39

DOI 10.1515/9781547400294-206

The Significance of Post-Retirement Risk 39

The Inadequacy of a Benefit Design Based on a Full Career 40

The DB Benefit Is Significantly Backloaded 40

Significance for Corporate Culture 41

Chapter 7: The Cash Balance Plan Conversion Crisis 43

What Is a Cash Balance Plan? 43

Why a Cash Balance Plan? 45

Why Did These Plans Have a Surplus? 45

Why Does a Funding Surplus Matter? 46

Why Cash Balance Plans Solved This Problem 46

Cash Balance Plan Conversion = A Decrease in Benefits for Older

Employees 48

Massive Employee Pushback 49

Chapter 8: The Secular Decline in Interest Rates and the Viability of DB

Plans 53

What About the Other Two Sponsor Risks-Investment and Mortality? 54

A Fundamental Lack of Transparency 55

Chapter 9: Getting Out, Slowly 57

The Increased Cost of Plan Termination 57

Getting Out Without Getting Out-The Plan Freeze 58

Taming Liabilities-Liability Driven Investments 58

The LDI Overlay 59

Chapter 10: Managing the DB Legacy-Reducing PBGC Premiums 63

Plan Funding, Briefly 63

PBGC Premiums, At Length 63

Pursuing a Contribution Policy That Reduces Variable-Rate Premiums 67

Variable-Rate Premium Fundamentals 67

Two Broad Strategies 68

Strategies for Maximizing the Value of the Headcount Cap 69

PBGC Premiums and Basic Retirement Policy 71

Chapter 11: The Cash Balance Alternative 73

The PPA Legitimizes the Cash Balance Design 73

Market Cash Balance Plans 74

Chapter 12: Intermezzo-Basic Policy Considerations Part I 75

Two Kinds of Office 75

What Are the Retirement Benefits? 76

The Status of Subsidized Benefits 77

A Legitimate Expectation That the Employer Would Continue the Plan 78

DB Plans, a Verdict 79

Who Pays for Retirement Benefits? 80

Retirement Savings Tax Policy-Two Views 81

Part II: Defined Contribution Plans and the 401(k)

Revolution 83

Chapter 13: The Rise of the 401(k) 85

Chapter 14: DC/401(k) Plan Basics 89

How Contributions Are Determined 89

How Assets Are Invested 89

How Benefits Are Paid 90

A Retirement Savings Design that Functions Like Compensation 90

What Happened to the Three Risks? 90

The Structure and Administration of 401(k) Plans 92

Chapter 15: The DC Adequacy Challenge 95

What Is Adequacy? 95

A Subjective Answer to the Adequacy Question 96

Towards an "Adequate" Policy Framework 96

Ambiguities 96

Three Sorts of Answers to the Adequacy Question 97

Adequacy of Investment 101

Payout 104

Chapter 16: Adequate Savings and the Regulatory Framework-Retirement

Savings Tax Incentives 105

The Current System 105

Retirement Savings Tax Benefits 106

How Much Are These Tax Benefits Worth? 106

Methodology 107

"Roth" versus Regular Contributions 110

Retirement Savings Tax Incentives, Rothification, and the Budget 111

A Middle-Class Tax Benefit? 112

Does This System Work? 113

Chapter 17: 401(k) Tax Code Nondiscrimination Rules 115

The ADP Test 115

The Dollar Limit on 401(k) Contributions 116

Passing the ADP Test 117

Participant Education 117

Matching Contributions 117

Safe Harbors 118

Defaults 118

Chapter 18: Adequate Investment-The Asset Allocation Challenge 121

Participant Education 122

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