Compliance or Policy?

This is going to be a fairly short post, I think. I want to talk a bit about what should be the greater influence on benefit program design -- compliance or policy?

Right now, and especially as PPACA (health care reform or ObamaCare, if you prefer) is starting to exert its influence, it seems that most benefit program design is structured to facilitate compliance with the myriad of laws that Congress has passed since ERISA was signed 38 years ago. Just think, you provide a big health care benefit, you pay a Cadillac Tax. Your NHCEs can't afford to defer to your 401(k), your HCEs don't get to benefit. You would like to provide your employees with retirement income, but you cannot stand the volatility in corporate cash flow and P&L of a defined benefit plan.

Seems wrong, doesn't it?

So, even to the extent that you have a policy that is governed by things like true long-term cost and what is right for your employees and your business, you are unable to implement that policy while being in compliance.

Seems wrong, doesn't it?

Of course, it's wrong, but the people who make the laws don't seem to get it. They don't believe in benefits policy. They don't believe in retirement policy. They believe in tax policy and gerrymandering the tax code to make it work, often at the expense of corporations (large and small) and their employees.

Seems wrong, doesn't it?

Building a 401(k) Plan that Prepares Employees for Retirement

It's one of the biggest concerns that I hear from people in 2012: "How will I ever be able to retire?" They tell me that their dad had a pension plan and Social Security, but they don't have a pension plan and they may not have Social Security. Whether these people will have Social Security benefits or not I can't tell you, but for most, their only employer-sponsored retirement plan will be a 401(k).

What does an employee whose only sources of retirement funds will be their 401(k) and Social Security need to do in order to ensure that he or she will someday have enough to retire? It's not rocket science, but it may not be easy either. Try this list on for size:

• Start saving early in your career. Money that is saved at age 25, compounded at just 5% annually will have more than double by age 40. But, at age 25, most people have other things in mind for their paycheck than their 401(k).
• Save continuously. Treat your 401(k) deferrals as if they will never be part of your paycheck. They are just money that is not there. In today's economy, that's not easy. When your expenses exceed your income, one way to cover that gap is to cut back on your 401(k). And, in these economy, more people than not seem to have an employment discontinuity. Just as employees don't have the loyalty to their employers that was once the norm, neither is the reverse true. Layoffs come frequently and re-employment is difficult.
• Invest prudently. Especially with the communications that plan participants receive, most of them have no idea what it means to invest prudently. They receive more advice than they know what to do with while their personal filters are not good enough to know which advice they should follow. One rule of thumb that I see frequently is that the percentage of your account balance that should be in equities is 100 minus your age. But, equities are volatile, and that has an effect -- a dramatic effect.
• Reduce volatility. Gee, John, didn't you just tell me to invest heavily in equities when I'm young, but that those investments are volatile? Actually, I didn't; I simply pointed out a common theme among the advice that plan participants receive. Consider this. Suppose I told you that in Investment A, the $1,000 that you deferred at age 25 would get an annual return of 5.00% every year until age 65, but in Investment B, your returns would alternate so that in the first year, you would get a return of -9.00%, in the second year, 20.00%, and that this would repeat itself until age 65. Simple math tells us that your average annual return would be 5.50%. So, which investment would you rather have (remember, these returns are guaranteed)? The answer is not even a close call. Despite the average return of 5.5% in Investment B, $1000 in Investment A after 40 years will accumulate to roughly $7,040 while $1000 in Investment B will accumulate to just $5,814. In fact, it would require the 20.00% return in the up years to increase to nearly 21.00% to make B as good an investment as A. Volatility is a killer.

So, the messages to the employees need to include 1) save early, 2) save continuously, 3) invest prudently, 4) reduce volatility. I would suggest that the first two items can be achieved for many people through auto-enrollment. But, most 401(k) plans that auto-enroll use a 3% deferral rate. 3% of pay is not enough. You'll never get there. Plans need to auto-enroll at rates closer to 10% of pay to ensure that employees will have enough to retire on. 10% is a lot. Many employees will opt out. It's going to be difficult.

The last two items relate to investments. The Pension Protection Act of 2006 (PPA) introduced a new concept to 401(k) plans, the Qualified Default Investment Alternative (QDIA). For employees who do not make an affirmative election otherwise, their investments are defaulted into the QDIA. Generally, QDIAs must be balanced funds or risk-based funds. Many plan sponsors use target date funds (TDFs) to satisfy the QDIA requirement. I went out to Morningstar's website to look at the performance of TDFs since the passage of PPA. All of them have had significant volatility. This is not surprising, of course, since equity markets have been extremely volatile over that period. But, we saw just a few lines up what volatility can do to you. Perhaps employees should be opting out, but into what? It's going to be difficult.

So, what are the characteristics of a 401(k) plan that guarantees employee preparedness for retirement? Many would argue that this 401(k) plan may not be a 401(k) plan at all. Perhaps what employees need is a plan that has some of the characteristics of a 401(k), but not all of them. Employees need to be able to save. Employees need portability as they move from one job to another. And, then, employees need protection against volatility and protection against outliving their wealth (longevity insurance). 

Consider that last term -- longevity insurance. The second word is insurance. Insurance generally is attained by a counterparty pooling risks. An individual cannot pool risks. An employer with enough employees can. An insurance company can.

Perhaps the law doesn't facilitate it yet, but a system in which employees can defer their own money to get a guaranteed rate of return (tied to low-risk or risk-free investments) and then have the amounts annuitized at retirement is the answer. Perhaps the law needs to facilitate it.

Senator Harkin Proposes Changes to Retirement System

As Congress approached its August recess, Senator Tom Harkin (D-IA) released a position paper entitled “The Retirement Crisis and a Plan to Solve It.” The release of the paper is notable because as the Chairman of the Senate Health, Education, Labor & Pensions (HELP) Committee, Harkin is perhaps the most influential legislator in the entire Congress with respect to qualified retirement plans. Here, I will give you an overview of Senator Harkin’s paper with some commentary. Given his position, should the Democrats retain control of the Senate and the White House, this paper likely signals a directional shift for the retirement industry.

Senator Harkin proposes two very significant changes:

• Development of Universal, Secure, and Adaptable (USA) Retirement Funds 
• Changes to the Social Security structure designed to better finance the program while providing better benefits for the lowest earners and inflation protection better geared to inflation as it affects senior citizens

USA Retirement Funds

Senator Harkin is concerned that so many Americans have essentially no retirement savings including any employer-sponsored retirement plans. The solution, as he sees it, is to give employers a choice of sponsoring their own retirement plans or putting their employees into a USA plan. Plans that are entirely voluntary for employees (401(k) without auto-enrollment or without a sufficient employer match) would not suffice as employer-sponsored. To the extent that they were to go the route of the USA plan, here are the key features as I read Harkin’s paper:

• ·         Auto-enrollment through payroll deduction
• ·         USA Retirement Funds would be professionally managed
• ·         Regions, industries, or collective bargaining agreements might have default funds
• ·         Benefits would be 100% portable
• ·         Retirement benefits would be payable as annuity with survivorship rights for beneficiaries

Senator Harkin notes in his paper that USA Retirement Funds will compete with each other keeping costs low. They will be subject to significant disclosure requirements to ensure transparency.

Social Security Changes

As we all know, the Social Security system is projected to run into a shortfall situation at some point between 20 and 40 years out depending upon which forecast we look at. Senator Harkin’s proposal is designed to address this while improving benefits for certain retirees at the same time. Here are the three key points of his proposal with respect to Social Security:

• ·         Eliminate the Social Security Wage Base (currently $110,100) so that higher earners and their employers would no longer have the phase-out of OASDI taxes. Currently, employees and their employers pay 6.2% of pay up to the Wage Base into Social Security and 1.45% of all pay into the Medicare (HI) part of the system.
• ·         The existing methods for calculating Social Security benefits use a progressive three-tier approach. Currently, 90% of a person’s Average Indexed Monthly Earnings (essentially, their average inflation-adjusted compensation over their career) up to $767 is added to two other components in calculating the benefit. Under Senator Harkin’s plan, that 90% would phase up to 105% over a 10-year period. What this would mean is that low wage earners would receive a larger benefit from the Social Security in retirement than the pay they had been receiving from their employer.

·         Today, the annual inflationary adjustment for Social Security beneficiaries is based on the increase in the Consumer Price Index for all Urban Wage Earners (CPI-W). This index would be replaced by the CPI-E, the Consumer Price Index for the Elderly which places significant emphasis on the rising costs of health care.

Another Viewpoint on Retirement -- Has the 401(k) System Failed?

Our Ridiculous Approach to Retirement - NYTimes.com

Last Sunday, Theresa Ghilarducci, a career retirement policy person and now Professor of Economics at the New School for Social Research wrote this interesting piece for the New York Times. In it, Ms. Ghilarducci's penultimate paragraph reads as follows:

It is now more than 30 years since the 401(k)/Individual Retirement Account model appeared on the scene. This do-it-yourself pension system has failed. It has failed because it expects individuals without expertise to reap the same results as professional investors and money managers. What results would you expect if you were to pull your own teeth or do your own electrical wiring?

In the article, she makes some very interesting points. Most people underestimate what they need to live well in retirement. One of her observations, however, is exceedingly important and rarely raised; that is, the probability that your last dollar will run out on the day you die is essentially zero, and if we take it to the moment you die, that probability, for the math geeks out there, is approximately epsilon (for you non-math geeks, that means it's not going to happen).

Put differently, this implies that you need to have more money in savings than you will need. But, all this is based on life expectancy. That's a median. Fully half the population will outlive that median. So, they need more. Do you know if you are part of that half? By how much will you outlive that life expectancy? Don't know that either, do you?

Clearly, the solution lies in lifetime income options, preferably with inflation protection. Where can you find that? It's tough. You can take your assets and find an annuity salesperson who will sell you such a product, although there aren't many such products around. And, given that there aren't many products, they are not priced fairly to the consumer. Then, there is the in-plan lifetime income option. But, I spoke to representative from a large 401(k) provider the other day who said that their research suggests that neither plan sponsors nor their employers currently want them.

So, how do you get lifetime income options? Defined benefit plans? You remember them, they used to be popular. Has anyone considered a low-risk (for the employer) defined benefit solution that might help to solve this problem? Sadly, the law has made this very difficult. But, consider this hypothetical design:

• Cash balance style
• There is a non-elective employer "pay credit" and a matching employer pay credit on employee contributions (this is not currently allowed)
• Inflation-protected annuities as a distribution option

What do you think? I'd love your comments, pro or con, serious or even with a little humor.

On the Origin of Species - Retirement Plan Style

It's been about 150 years since Charles Darwin wrote about his theory of evolution. He also, as we know, discussed Spencer's phrase "survival of the fittest." This seems to work pretty well in the worlds of zoology, botany, and ecology. But, does it work with regard to retirement plans?

I guess that part of the premise would need to include what exactly is a fit retirement plan. Is it a plan that allows people to retire? The terminology alone would seem to suggest that. Is it a plan which might assist people in their goal of retiring, but doesn't cost an employer very much? Is it a plan, jury rigged over the years, to assist politicians in their never ending goal of changing stuff to help them get re-elected?

I'd like to believe that a fit retirement plan or retirement system will allow participants to retire after a normal working lifetime. 30 years ago, we had such a system, and it existed without 401(k) plans. But, I guess I must be mistaken, as clearly, that system has not survived. But, it's not been without outside influence -- largely Congress. You see, every year or two for the last 30, when it's come time to develop a budget for the upcoming fiscal year and the country has needed some revenue enhancers, Congress looks to the retirement system. And, it's a really cool solution, too, because nobody understands what Congress is doing (and that includes Congress), but it doesn't affect Congressional retirement benefits.

In his Origin of the Species, Mr. Darwin did not have to consider Congress, or even Parliament.

The 401(k) system cannot be the correct answer. It has too many rules. And, many of the rules and goals conflict with each other. Consider a system containing all of these features.

• If your low-paid don't participate to a great enough extent, your high-paid aren't allowed to.
• If you don't communicate the plan and its benefits to the low-paid, they won't participate to a great extent.
• If you do communicate the plan and its benefits to the low-paid, then the plan is useful to the high-paid, but it costs the company more, cutting into profits.
• Cutting into profits competes with the goals of the management team.
• This affects dividends paid to shareholders which, in theory, is the reason a person holds shares in a company.

And, this is now the primary retirement vehicle for the majority of US companies.

But, wait, we have a Presidential election coming up in just over a year. And, with that, 33 or 34 Senate seats are up for grabs as well as 435 seats (actually a bunch of them are not contested) in the House of Representatives. With those elections will come a bunch of new allegiances. Will your Congressman or Congresswomen be aligned to the Occupy movement, the Tea Party, the Green, the Libertarians or some other group? How about the others? I'm not smart enough to tell you. But, I am smart enough to know that the allegiances of the new group will be different than those of the existing group. So, with this new group will come retirement plan change. 

Maybe this change will be 401(k) biased. Maybe it will revolutionize retirement plans. But in any event, it will do something.

And, you heard it here first, my bet is that they will do something stupid.

If we look at the way things are now, though, people in the workforce are just not going to be able to retire. Yes, some will, but most won't. Certainly, they won't be able to by age 65. What's so special about age 65? It's been a retirement age for a long time. When it first came about, those who were fortunate enough to outlive that age usually didn't do it by too much. Now they do. So many argue that the working lifetime should be extended. But companies don't want to keep the post-65ers employed. These days, they seem to prefer that with the post-55ers as well. And, for that matter, by the time people hit age 65, most of them are just worn out from full-time work.

The 401(k) isn't going to fix it. Maybe we need a fitter plan.

It's Not Just Math

What is so special about $1 million? Is it that much more special than $999,999? Not to me. They would both represent a significant amount of income for one year -- more than I ever expect to see. What is so special about a defined benefit pension plan having a funded status (AFTAP) of 90% or 92% or 94% or 96% or 100% instead of 0.01% less than any of those magical percentages? Nothing that I can see.

Yet, much of public tax policy seems to revolve around hitting or missing these thresholds or cliffs as I think of them. Make the mark and all is well. Miss it by the smallest of margins and you fall off ... perhaps to your death.

I'm sorry. Cliffs may exist in the landscape, but putting them into tax policy is just plain stupid. I repeat, it's just plain stupid. You want to know what I really think about cliffs in tax policy? Let's move on.

I decided to read the President's version of the American Jobs Act of 2011 (AJA). If you want your own copy, you can get it at http://www.whitehouse.gov. It's 199 pages and it's not a fun read. It doesn't have a real good plot; in fact, there is no mystery in this thriller.

I am going to focus on something specific here, and I am going to tie it back to 401(k) plans. According to the current version of AJA (not Steely Dan's version or Louie Gohmert's version), a married couple filing jointly becomes more fortunate when their combined earnings equal or exceed $250,000. By my quick reading, it would suck to have combined earnings of $250,000. $2,500,000 would work out just fine, but if my earnings (combined with those of my wife) were exactly $250,000, I would be looking to find a way to give up one of those dollars to get to $249,999.

Because of the cliff-like nature of tax policy, trust me, the couple earning $249,999 would be far more fortunate than the couple earning $250,000. Their deductions (also known these days as loopholes) wouldn't go away.

What is one of those deductions? How about the one that you get for deferrals to a 401(k) plan or the one that you get for pre-tax payments of health care premiums? At $249,999, you still seem to get them; at $250,000, to quote Phil Rizzuto (that is scary), those deductions will be gone, gone, goodbye. So, after figuring in the tax bill, earning one dollar more costs you a whole bunch. That is just plain stupid.

To quote President Obama, "[I]t's not class warfare; it's just math." President Obama is a very smart man. He taught constitutional law, and I presume that he knows far more about it than I do. However, I taught math and he didn't. This is not just math (I leave the proof that it is or is not class warfare to the reader as that's what authors do in math books).

When there is a literal incentive to earn less or a disincentive to earn more, that's not just math. It's stupid. When a cliff causes you to be worse off than if you had successfully begged for a $1 lower salary, that's stupid.

Some of my readers tend Democrat, some tend Republican, some do not tend at all. This is not about that, however. You can tax the high earners more or not as you choose, but as for the AJA, it's not just math!

Will the Super-Congress Kill Your Benefits?

If you haven't been hiding under a rock, you know that Congress reached a budget/debt deal last week that was signed into law by the President. Well, they sort of reached a sort of deal.

They increased the debt limit by more than $2 trillion and they cut spending by about $2.5 trillion. Except that they didn't. You see roughly $1.5 trillion of that savings is yet to be decided. The dreaded Super-Congress (three each of Senate Democrats, House Republicans, Senate Republicans, and House Democrats) is charged with coming up with a plan to find that other piddling amount. If they can't do it by November 23 of this year, then the nuclear option kicks in (stop your wishful thinking, nothing inside the Beltway will be nuked). In oversimplified terms,  the nuclear option will make pre-specified cuts adding to roughly $1.5 trillion. And, those pre-specified cuts will come to a large extent to each party's sacred cows -- defense spending and entitlement spending.

So, somewhere between November 22 and November 23, the Super-Congress will miraculously reach agreement. Remember, you heard it here first.

Thus far, we know the names of 9 of the 12 members of the Super-Congress (the 3 House Democrats are yet to be named). Perhaps more important, we know the names of the co-Chairs: Senator Patty Murray (D-WA) and Representative Jeb Hensarling (R-TX). To say that there is common ground between these two is roughly akin to saying that Kennedy and Kruschev were best friends. I'll let you guess on the details.

So, why am I writing about this in a blog that is usually devoted to benefits and compensation? I'll get to that soon, but I am glad that you asked.

As the Super-Congress gets named, various members have deigned to give interviews to the media. The Democrats say that entitlements need to stay as they are and that the wealthy need to pay more taxes. The Republicans say that the defense budget is critical and that new taxes are not on the table.

Where they agree, though, is that we have too many tax loopholes. Their may not be agreement on what constitutes a loophole, but you can't have everything.

I don't recall where, but I read somewhere that the three largest tax expenditures are these (in no particular order):

• The mortgage interest deduction
• The employer deduction for health benefits for employees
• The combination of the employer deduction for retirement benefits for employees and the tax-free build-up of assets in trusts for qualified retirement plans

The first one, in my opinion, is a goner. Not in its entirety, but above some limit, there will be no tax deduction for mortgage interest. And, there will be no deduction for interest on any but a primary residence. Again, in my opinion, as this has been floated before without tremendous resistance, this seems obvious.

The other two, they are in serious trouble. And, if either or both suffer, so will you, the American worker.

Let's use an example to illustrate. Suppose your cash compensation is $100,000 per year. Let's estimate then that the total cost of your employment to your employer (before tax deductions) is $140,000 (this number may be high or low, but it's not a bad representation). Presently, your employer gets a tax deduction for virtually every dollar of that. So, assuming a 35% marginal tax rate, that means that after $49,000 in tax deductions, you cost your employer $91,000 per year.

Are you with me?

Again, in very round figures, suppose your health and retirement benefits cost your employer $15,000 per year (before the effects of tax deductions). At 35%, the deductions for that will be $5,250. So, eliminating these deductions will cost your employer $5,250 (with respect to your employment). Do you think you are going to continue to get the same benefits? Think again. For most of you, the answer is no, or perhaps it's NO!

Your employer is going to cut its contribution to your benefits to save that $5,250. So, the value of your employment package will decrease by about $5,000 on a baseline of $140,000. That's a little more than 3.5%. Oh, you don't think that sounds like much? In this economy, how long does it take you to get a 3,5% pay increase? For many of you, that could be two or three years.

So, how can this happen. Well, the Republicans will swear up and down that this is not a tax increase and they will tell you that they have held to their pledge to not increase taxes. The Democrats will fight hard to ensure that this change does not apply to the lowest paid workers and that its effect progressively increases as a worker's pay increases, probably phasing in completely somewhere around $150,000 of cash compensation.

And, the chosen twelve will shake hands and know that they have saved their sacred cows, and each side will go back to its constituency and say that it has won. Don't believe them for a second. The losers will be you and me. The losers will be the American workers who "get up every morning to the alarm clock's warning, take the 8:15 into the city" (I know, Bachman-Turner Overdrive was a Canadian band, but the lyrics fit).

Remember, you read it here first. 

What Happened to Federal Retirement Policy?

This afternoon, Senator Tom Harkin (D-Iowa) will convene a hearing to determine the role that pensions play in building a strong and vibrant middle class as well as stimulating the economy and fueling job creation. This, not all that long after the National Commission on Fiscal Responsibility and Reform (Debt Commission) proposed that the limitation on contributions on behalf of an employee to defined contribution plans be limited to the lesser of 20% of pay or $20,000. And, finally, to make it a trifecta, the general consensus among politicians who are opening their mouths is that we need to raise the Social Security Normal Retirement Age (SSNRA), cut back on Social Security Cost of Living Adjustments (COLAs), and increase FICA taxes on current workers.

With the Pension Protection Act (PPA) already having done a better job of gutting (rather than protecting) the private pension system than all legislation before it, how will workers ever manage to retire?

Let's look at some facts and some opinions (I'll let you figure out which are which, but I think it will be pretty obvious).

• Americans are living longer -- much longer
• American companies constantly look for ways to legally discharge older workers
• Periods from retirement until death are longer than they have ever been before
• Median savings (outside of qualified retirement plans) among Americans are at modern lows

And, you know what, while it is a commonly held opinion that workers need to work longer (perhaps the same percentage of the period from, say, age 25 to life expectancy that they always have), many companies look for ways to get rid of those older workers. In fact, under the Age Discrimination in Employment Act (ADEA), the protected class consists of people between the ages of 40 and 69. Turn 70, sayonara! From the worker's standpoint, if you always had it in your mind that you were going to retire at age 65 (how could that happen other than that when you started working, you had all kinds of employer-sponsored and government-sponsored plans that specified a retirement age of 65), then it gets tougher and tougher to work at later ages. Your golden years don't seem so golden. 

Oh, yeah, Congress still has the most lucrative retirement plan of all. They don't place the same limits on their plans that they place on yours and mine. They don't get it.

So, the next lovely plan that comes out will probably have some wonderfully constructed name like the Save our Country's Retirement for Employees and Workers who Really Expected The Ideal Retirement to End Most Every Nice Tale. I know -- it doesn't make sense. But, the acronym seems to -- SCREW RETIREMENT.

Senators to Introduce Legislation to Cut Spending, Raise Revenue

Senator John Warner (D-VA) and Senator Saxby Chambliss (R-GA) have announced that they will introduce a spending reduction and revenue raising bill in the Senate. Yes, you read that correctly -- that's one Democrat and one Republican.

While, the bill has not yet been introduced, the Warner camp has leaked enough information that we have some pretty good hints about what to look for. Here is a summary.

• Change the tax treatment for mortgage interest from a tax deduction to a tax credit and place a cap on it that would make it apply to only the first $500,000 of a loan. Further, it would eliminate any deductions related to homes other than principal residences.
• Lower marginal federal income tax rates, presumably to the levels recommended by the Debt Commission (see my earlier post on the topic here: http://johnhlowell.blogspot.com/2010/11/debt-commission-retirement-plans-and.html )
• Gradually increase the Social Security Normal (full) Retirement Age to 68 by 2050 (people born in 1982) and to 69 by 2075 (people born in 2006). 
• Increase the OASDI (Old Age, Survivors and Disability Insurance) portion of Social Security tax on high earners. Presumably this means that the 6.2% OASDI rate will be extended from the Social Security Wage Base to infinity (and beyond for you Buzz Lightyear fans).
• Reduce Medicare benefits.
• Reduce defense spending.

There are a lot of sacred cows in there. This is going to be controversial. But, according to comments from Warner's office, everything needs to be in one bill for an up or down vote. He says that individuals shouldn't pick and choose, but should either say that this bill is right or wrong. As of now, there appear to be roughly 10 co-sponsors for this bill from both sides of the aisle. We'll keep you apprised as we learn more and are able to untangle what this means for compensation and benefits issues.

The Fair Tax and Benefits and Compensation

Representative Rob Woodall (R-GA) yesterday re-introduced (it was HR 25 in the 111th Congress as well) the so-called Fair Tax. Thus far, the bill has 47 co-sponsors, most Republican, but some Democrat. There have been whole books written on the topic, so its far too complex to explain here, but I'll give you the simple version.

• All existing federal taxes would be repealed
• The IRS would be abolished
• The federal government would get its revenues primarily from a 23% sales tax on finished products, but not on intermediate steps (so not a VAT tax)
• Basic necessities would be paid for with a prebate

Let's think about an employee's rewards package, currently. Typically, it includes all of these:

1. base compensation which may be a salary or may be based on hours worked
2. additional cash compensation (for some) in the form of sales commissions, a bonus, or overtime
3. health benefits
4. a 401(k) plan that may have an employer matching contribution
5. (perhaps) an additional retirement plan
6. (for the lucky few) equity compensation
7. some other benefits

Numbers 1 through 6 and parts of 7 are generally tax-deductible for an employer. That's a big reason that they are willing to offer these rewards. In fact, where the costs of certain parts of a rewards package may not be tax-deductible for an employer, they pay tax departments, tax advisers and sometimes lobbyists millions of dollars to make them tax-deductible.

So, what if there were no corporate income tax? Then, there would be no tax deductions. Would employees still get a similar rewards package? Probably not. But, what of the group purchasing power of various benefits? Perhaps employee groups would be formed that would be group purchasers. Perhaps, new methods of getting better deals would arise. But, in any event, the landscape would change.

So, if you are in favor of the Fair Tax, be ready to deal with the consequences as well, whether you consider them good or bad.

401(k) Participants Want More Advice

Do you sponsor a 401(k) plan? Do you participate in a 401(k) plan? I would bet that if you live in the US that at least one of these is true, otherwise you wouldn't be reading this.

NEWS FLASH: A recent Wells Fargo survey indicates that many participants do not know how much money they will need for retirement. However, 79% said they want more advice from their employers. Further, large numbers (spanning all 5 generations, presumably Boomer, X, Y, Millennial, and Z) would favor legislative and or regulatory change to facilitate the provision of such advice by employers.

82% of respondents said that a lifetime income option should be made available. Why is it then that in situations where the plan does not offer such an option, virtually nobody buys their own annuities? Could annuity design be bad? Is pricing bad? Are the participants from the ' do as I say not as I do mold?

Perhaps most alarming is that 56% of 50-somethings are confident or very confident that they will have the money they need to maintain their existing lifestyle in retirement, yet the median retirement savings of those aged 50-59 is just $29,000 according to the survey. I agree that this is alarming -- very alarming. But, I am going to call out Wells Fargo on this one. How do you know that their median retirement savings are only $29,000? Do they have all their retirement savings with your bank? Are you sure? I have one 401(k) account balance with something less than $15,000 in it at the age of 53. Does that make me unprepared? Does whoever would be researching me know if I have any pensions? Do I have any IRAs? Outside investments? Other 401(k)s? I've seen this sort of statement many times from most (perhaps all) of the big players in the recordkeeping business. Shame on all of them.

I'll go back to being nicer now. I agree with most of Wells Fargo's conclusions. The current system isn't working. Congress needs to be part of the solution and IMHO, they have more frequently been a big part of the problem.

Public Employer Pension Funding Bill Introduced

Yesterday, three Republican Congressman (Devin Nunes and Darrell Issa of California, and Paul Ryan, incoming Budget Committee Chairman from California) introduced the Public Employee Pension Transparency Act (PEPTA). Under PEPTA, sponsors of public pension plans would need to disclose the following:

• Funding status including:

• Plan's current liabilities as measured for accounting purposes
• Plan assets available to pay for that liability
• The amount of unfunded liability
• The funding percentage
• A schedule of contributions for the year indicating which are counted in disclosed plan assets

• Alternative projections based on regulation from Treasury
• 20-year forecast of 
• contributions
• plan assets
• current liability
• funding percentage
• other information required by Treasury
• Using assumptions specified in regulations
• And specifying assumptions used for
• funding policy
• plan changes
• workforce projections
• future investment returns
• Statement of actuarial assumptions and methods
• Participant counts, including active, retired and deferred vested
• 5-year history of actual investment returns
• Statement explaining how the sponsor plans to eliminate the plan's underfunding
• Statement explaining to what extent the funding policy has been followed for the last 5 years
• Statement of pension funding bonds outstanding

Failure to comply will make the sponsor ineligible to issue federally tax-exempt bonds. 

You can find the PEPTA language here: http://nunes.house.gov/_files/NUNES_068_xml.pdf

The informational posting on Congressman Nunes' web site is here: http://www.nunes.house.gov/_files/PensionTransparencyTrifold.pdf

Think Tank Recommends Decreases in Tax-Favored Retirement Contributions

The Bipartisan Policy Center (supported by the Economic Policy Institute) recently unveiled a proposal, that among other things, would decrease the total amount that could be contributed to tax-favored, or qualified, retirement plans to $20,000 or 20% of pay, whichever is smaller. (You can read the full report here: http://www.bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf . The section referenced above can be found on page 39 of the 140 page document.)

This would serve to make many Americans even less prepared for retirement than they are currently. Companies with defined benefit plans and defined contribution plans (yes, there still are a few) could be limited in their contributions. Even participants in 401(k) plans would often see their deferrals reduced.

This is lunacy (assuming that the income tax is continued). In a day where 'leakage' (losses in 401(k) accumulation due to loans, hardship withdrawals and discontinuity in employment among other things) is commonplace, workers who would like to retire someday need to be able to catch up during good times. The Congress and President saw this in 2001 with the passage of EGTRRA in 2001 which allowed for "catch-up" contributions for those at least age 50.

It seems to this writer that under that structure, the two groups of people who will likely be able to retire are those with ultra-high income and those with very low income. The first do not have costs that tend to obliterate their incomes (unless they choose to live that high off the hog). The latter will live off of Social Security and Medicare or Medicaid and have a lifestyle similar to what they had when they were working (or not). For the rest, costs like education for their children, energy, housing, and taxes will diminish their abilities to save for their own retirement. Being deemed redundant in the workplace may result in layoffs that further cut into any savings they may have.

This proposal is akin to classism -- a stratification of classes where in this case, the true upper class are fine, the lower class may be better off in retirement and the middle class will work forever (if they can) in order to not become the lower class.

With Regard to Benefits and Compensation, Whither Goeth the 112th Congress?

We, the people, have recently elected a new Congress. Unless you have been hiding under a rock, or perhaps a pile of rocks, you know that the Republicans have taken control of the House of Representatives and that the Democratic majority in the Senate is probably subject to filibuster on any issue with which the Republican leadership has really significant disagreement. Finally, the Republicans seem particularly united on what they consider to be their key issues.

So, the general thoughts are that Health Care Reform will get repealed, retirement legislation will be more employer and less union friendly, and compensation restrictions will largely be gone. Hold on! We don't have a Republican President. The Republicans in Congress can say all they like and they can try for all they want, but likely the best they can do during the 112th Congress is to try to work with the Democrat Party to reach happy compromise.

Current thoughts include these:

• The Republicans will use their majority in the House and their filibuster ability in the Senate to block funding for enforcement of Health Care Reform. While this sounds good to those who would like to see Health Care Reform disappear, my opinion is that doing this will alienate many swing voters and guarantee a Democrat return to majority in the 2012 elections.
• George Miller, Chair (until January) of the House Health, Education and Labor Subcommittee, will not have the influence that he has had with a Democrat majority. His personal agenda, focused on what some would consider over-disclosure to participants, is likely to fall by the wayside. Thus, all disclosure projects in the next two years will need to come through the DOL rather than through Congress.
• As a group, the Republican Party tends to intervene much less in corporate compensation decisions than the Democrat Party, but this is a hot button for the President. Don't expect the President to give in on this one, he has referred to Wall Street "fat cats" enough times that we can be sure that he will not sign any bill that lifts restrictions on executive pay.
• Where marginal tax rates will be in 2011 will influence benefits decisions. I have my suspicion that the EGTRRA (Bush) tax cuts will remain for all taxpayers through 2012, but I sure wouldn't bet my life on it.

So, whither goeth Congress on benefits and compensation issues in the short term? I think the answer may be nowhere.