A Less Expensive Way to Provide Better Retirement Benefits -- DB

I've been pushing defined benefit (DB) plans hard lately. I still believe in them. The problem as I have noted is that regulators don't. They have done everything they can to kill them. Many are gone, many remain.

Yesterday, I happened upon a brief from Boston College's Center for Retirement Research. If you want, you can get the full brief here. In the brief, based on 23 years of data, Alicia Munnell, Jean-Pierre Aubry, and Caroline Crawford -- all from the CCRC -- demonstrate that returns on assets in DB plans actually are better than those in defined contribution (DC) plans.

When you combine this with the inability of many to defer enough to their 401(k) plans to get the full company match, you can see why many will never be able to retire well with a 401(k) as their core retirement plan.

For years, though, the cry has been that people understand 401(k) plans, but don't understand DB. But, suppose I gave you a DB plan that looked like a DC plan, provided returns for participants like a particularly well-invested DC plan, provided better downside investment return protection than a DC plan, and cost the employer less than a DC plan. What would you think?

In the Pension Protection Act of 2006 (yes, that was more than 9 years ago), Congress sanctioned what are now known as market return cash balance plans. What they are are DB plans that look like DC plans to participants, provide more and better opportunities for participants to elect annuity forms of distribution if they like, and provide the opportunity for plan sponsors to control costs and create almost a perfect investment hedge if they choose.

Suppose you had such a plan. Suppose to participants looking at their retirement website, the plan just looked like another account any day they chose to look. Suppose the costs were stable. Suppose the plan provided you as a sponsor more flexibility.

That would be nirvana in Xanadu, or something like that, wouldn't it?

Retirement Aspirations Around the World

The HSBC group conducted a similar study, "HSBC Future of Retirement." It surveyed over 11,000 people around the world and published a thorough analysis about how individuals in various cultures perceive a typical retirement. Among its findings:

* Canadians view their later years as a time of reinvention, ambition and close relationships with friends and family.

* Americans view their later years as a time for opportunity, new careers and spiritual fulfillment, but are less focused on family or health than are people in other countries.

* The French view these years as a time of dreams and aspirations, but also as a time of worry, and they are concerned about being a burden to their families.

* The British view later life as a time of self-sufficiency, independence and personal responsibility, counting on neither government nor family to care for them.

* Brazilians view later life as a time for slowing down, relaxing and spending time with their families, relatives, and friends, and they expect significant support from their children.

* Mexicans see it as a time for continued work and hard-earned financial stability.

* In China, younger generations view retirement as an opportunity for a new life but continued careers, while older generations want to stop working and relax. All Chinese people view family as an important source of happiness and support.

* Respondents from Hong Kong view it as a time for rest, relaxation and the enjoyment of accumulated wealth, which is seen as the cornerstone of well-being.

* Respondents from India view later life as a time to live with and be cared for by their families.

* The Japanese look forward to their later years as a time of good health, family considerations and continued fulfillment from work.

Does 401(k) Match Not Promote Savings?

A study conducted by James J. Choi (Yale), David Laibson (Harvard), and Brigitte C. Madrian (Harvard) suggests that employer matching contributions to 401(k) plans are not a significant motivator in increasing participation. While we don't have all of the details of the study, we do know that the researchers focused on participants at least age 59 1/2; that is, they focused on participants who, assuming their plans allowed it could make a deferral, get their match and withdraw the amount immediately, creating a taxable event, but not an excise taxable event.

I wish I had access to the actual questions and data. The arbitrage technique that the researchers note is probably not well known. I have not done the research myself, but I would hazard a guess that more benefits professionals than not would neither know of this technique, nor would think to avail themselves of it if they could.

Other factors that could easily be contributing to the data depend upon the sample population. Additional data that might be helpful in understanding this analysis and drawing a conclusion include (but are not limited to) these:

• Did the researchers eliminate people from their study who had recently taken a hardship withdrawal?
• Were any or all funds eligible for immediate in-service withdrawal in all of the plans?
• If not, would factors such as children in college, parents in long-term care, or uncertainty with regard to plan investments have been deterrents?
• Were plan communications to participants clear enough that participants would know AND UNDERSTAND that the technique the researchers describe was available?
• The researchers appear to suggest that even with education, participants would not change their behaviors. Is there reason to believe that participants have become an untrusting group, especially when it comes to employer-provided benefits?

The researchers have drawn surprising conclusions, and while their data may support it, my personal experience in consulting suggests that their conclusions either are flawed or not clearly enough reported in the following article : http://fiduciarynews.com/2010/11/new-study-explains-why-the-401k-match-fails/

In any event, it's interesting food for thought.