Why Would We Ever Create a New Plan to Do Exactly What an Existing Plan Already Does?

I think my title is self-explanatory. Suppose you have a perfectly good employee benefit plan, in this case, a retirement plan, why would you seek to change another type of plan to make it look like the perfectly good plan?

I think that is a great question, but lots of people seem to disagree. Congress. Think tanks. People with something to gain from rejiggering the plan they indirectly benefit from to replace something that solves all the same problems and is already in place.

I'm sure you're wondering where I am going with this. If you want a deep dive, I wrote one for Human Resource Executive. It got a fair amount of good feedback including that from one finance executive who described it as "true thought leadership."

So, what's the problem? The problem is that participants are worried about their retirement. They are worried about outliving their savings. They are worried about a lack of lifetime income protection. They are worried about the fate of their retirement hinging on their Social Security and their 401(k).

Of course, Congress has an excellent response. Let's take the 401(k) and twist it and turn it until it looks more like a pretzel or worse yet a Mobius Strip or Klein Bottle. Let's make sure that it gets annual disclosures. And let's make sure that those disclosures estimate (poorly, I might add) the amount of lifetime income that plan can buy for you. And, let's see what we can do to mandate that lifetime income options be available from those plans, albeit ensuring that there is room for insurers and fund managers, and investment managers to profit from it which, of course, means that the lifetime income you are getting as a participant is not really a fair amount. 

This makes no sense. Not to me. And, it shouldn't to you. 

You know we already have a perfectly good plan type that provides lifetime income as a default. It provides security and that is what the public is looking for. It's called a defined benefit (DB) plan and despite what our legislators in Washington seem to think, those people who have them do not want to give them up. Under any circumstances. In fact, I could point you to swaths of people who once they have such a plan will not leave the organization that provides it unless their new organization gives them something similar. Yes, both will offer a 401(k), but only one provides the security of lifetime income. Necessarily, if the participant wants it.

If you took the 8 minutes (that's what Google tells me it takes) to read my article in the link above, you'll understand that this is workable. It might not be the DB plan that your parents had 30+ years ago, but it's still a DB plan. What makes it better is that your employer will like it too. You can understand it and they can understand it. And, as you noticed, when you retire, you can choose how much you want as a lump sum, within some reasonable limits, and how much you want in the way of lifetime income protection.

That, my friends, is what the American populace is screaming for. Yet, Congress, having a perfectly wonderful solution staring them in the face, is looking for a way to make the 401(k) plan look like that perfectly good solution, albeit with your money leaking to every constituency out there.

That makes no sense, does it?

Create your plan of the future using the tools we already have in that neat little box called DB.