Surprise -- Employees Want Pensions

I read an article yesterday highlighting, as the author pointed out, that employees value benefits more than a raise. Some of the findings were predictable -- the two most important were health insurance and a 401(k) match and they were followed by paid time off. But, just barely trailing those were pension benefits with flexible work hours and the ability to work remotely far behind.

Let's put some numbers behind the ordering:

• Health insurance -- 56%
• 401(k) match -- 56%
• Paid time off -- 33%
• Pension -- 31%
• Flexible work hours -- 21%
• Working remotely -- 15%

What I found remarkable about this is that five of those six get constant attention. In today's workplace, however, as compared to one generation ago, pensions get little, if any, attention yet nearly one-third of workers would rather have pensions than a raise.

Why is this the case? Neither the survey nor the article got into any analysis as to the reasons, so I get to way in here entirely unencumbered by nasty things like facts. I get to express my opinions.

Ask a worker what they fear. I think they will tell you that two of their biggest fears are losing their health and outliving their savings. The second, of course, can be mitigated by guaranteed lifetime income.

Workers are beginning to realize that 401(k) plans are exactly what Congress intended them to be -- supplemental tax-favored savings plans. In fact, generating lifetime income from those 401(k)s is beyond what a typical worker is able to do. Their options for doing so, generally speaking, are to self-annuitize (when you run out of money, however, the guarantee goes away) or to purchase an annuity in the free market. 

That, too, comes with a problem. While that purchase is easy to do and does come with a lifetime income guarantee, it also comes with overhead costs (insurance company risk mitigation and profits plus the earnings of a broker). Roughly speaking, a retiree may be paying 20% of their savings to others in order to annuitize. That's a high price. Is it worth it? Is that why workers want pensions despite often not really knowing what they are?

Pensions are not for everybody; they're also not for every company. But, this survey strongly suggests that companies that provide pensions may become employers of choice. In the battle for talent, that's really important.

Many companies exited the pension world because the rules made those pensions too cumbersome. But, the rules have gotten better. They've put in writing the legality of plans that many employers wanted to adopt 15 to 20 years ago, but feared doing something largely untried. And, there is bipartisan language floating around in Congress that would make such plans more accessible for more employers.

Designed properly, those plans will check all the boxes for both the employer and the employees. It seems time to take another look.

Time to Revisit the Work Relationship

I read an article the other day highlighting some findings from a Willis Towers Watson survey. Quoting from the article:

Yet only 25% rank contributing to a health savings account (HSA) as a top current financial priority, falling below saving for retirement in a 401(k), paying for essential day-to-day expenses and paying off debt. The survey found the majority of employees (69%) who didn't enroll in an HSA said they chose not to because they didn't see the benefit, understand HSAs, or take the time to understand them.

Let's think about the hidden part of what is being said there. The relationship between employers and employees has changed. As two factions battle for dominance in what that relationship should look like -- those who preach self-reliance think that employers should provide availability of savings options only and those who preach mandated pay and benefits think that the only differentiators should be things like office gyms and juice bars -- we are left in a world where creativity is encouraged, but not in any determination of how employees are rewarded.

If you were to take a survey of which benefits employees find the most important (many have, but I can't put my hands on one right now), I suspect that numbers one and two would be their health benefits and their 401(k). Why? The data that I cite above shows that most don't understand their health benefits and having worked in the retirement space for more than half my life, I can tell you that the large majority don't understand their 401(k) either. Many understand what it is, but relatively few understand what it's not.

So much for the people who preach self-reliance as in 2018, those are two benefit types that are the epitome of self-reliance.

Let's turn for a moment to another side of the equation -- pay. The other side of the spectrum would have us believe that as an employer, you are not particularly entitled to differentiate between employees based on much of anything because if the data suggests that any two employees are paid any differently from each other and it is even remotely possible that maybe someone in their wildest dreams could divine that those differences in pay are based on something that the law doesn't or shouldn't, in their opinion, allow, the company is in trouble.

Suppose we were to scrap the current system. Suppose different companies offered different benefits that their employees could understand. Suppose they paid employees based on the value they brought to those companies (yes, I know that value is nigh impossible to measure).

In the thought to be antiquated employer-employee relationship that existed 30-35 years ago, consider what we had:

• Companies were generally nicely profitable;
• Employees tended to stay with the companies that they worked for at age 35 until they retired;
• Those employees, generally speaking, lived as well as or better in retirement than they did while they were working;
• Health benefits were such that employees didn't go into debt to pay their share of them from every paychecks; and 
• Neither the country nor its citizens were reeling in debt.

I also see data that tells me that more than half (usually about 55%) are on track to retire. Translated, that means that nearly half are woefully behind. That's not a success. That is an utter failure.

The experiments of employee self-reliance and of paying everyone the same because you're not allowed to pay them differently have been failures. More likely than not, they will remain failures. 

Perhaps it's time to see what was right about the employer-employee relationship in the 80s and bring it back. Let's aim for 100% of employees being on track to retire. Let's aim for benefits that employees use because they do understand them. Let's pay people that deliver value in the workplace. It is time to revisit the work relationship.

When Pensions Met Vintage TV

Many of my readers are pretty familiar with pension plans. Those of you who have been around for a while may remember a time on the TV show 60 Minutes before the closing segment was occupied by Andy Rooney. Back in the late 70s, it was Shana Alexander on the left versus James J. Kilpatrick on the right on the Point-Counterpoint segment. In the early days of Saturday Night Live, this also led to the Jane Curtin-Dan Aykroyd segments famous among other things for their tag lines, "Jane, you ignorant slut," and "Dan, you pompous ass."

What does all this have to do with pensions? Not a thing, but today I'm going to tie them together anyway.

In any event, late last week, I read an article highlighting a Prudential study on the uptick in pension risk transfer (PRT). I thought that bringing back Shana and Jim (or Jane and Dan if you prefer) might be a good way to discuss it.

Point: 31% of respondents to the survey said that desire to reduce their pension plan's asset volatility was a key reason to engage in PRT.

Counterpoint: Jane, you ignorant slut, that means that 69% of plan sponsors didn't think that reducing asset volatility was a big deal. And, as I'll explain to you later, asset volatility can be dealt with.

Point: Dan, you pompous ass, another 25% said they wanted to focus on their core business rather than deal with a pension plan.

Counterpoint: But, Jane, you ignorant slut, a pension plan is part of their core business and 25% isn't very many anyway.

Point: Dan, you pompous ass, 25% said that they were tired of having to deal with small benefit amounts.

Counterpoint: Jane, you ignorant slut, if they didn't freeze their pensions, those companies wouldn't have to deal with small benefit amounts. Everyone would have wonderful pensions benefits.

We'll return to Point-Counterpoint after a short commercial break, but while that's airing, let's consider what each of our erudite commentators is pointing toward. Shana/Jane (actually likely taking the more conservative Jim/Dan role) are taking the position that managing pensions has just gotten out of hand in the US. With rising PBGC premiums and wild asset fluctuations, they want out of the pension business, at least to the extent possible.

At the same time, the other side is espousing that pensions can help with workforce engagement and management and that asset fluctuations need not cause angst for plan sponsors.

After hearing "Plop plop, fizz fizz, oh what a relief it is" and "Mr. Whipple, please don't squeeze the Charmin," we return to our regular programming.

Switching to our more traditional commentators ...

Point: Jim, so you are trying to tell me that companies should still maintain these blasted pensions and that the problems that a group of CFOs are worried about just don't matter?

Counterpoint: No, Shana, they matter. But, they are solvable. You've never had a creative mind, Shana.

Point: Jim, you're getting curmudgeony now. If you don't watch it, they'll replace you with that Rooney guy with the bushy eyebrows.

Counterpoint: Shana, I've heard you talk about LDI (liability driven investments), but how come you never talk about IDL.

Point: Jim, now you've lost it. Are you telling me that Interactive Data Language should be part of a pension discussion. Or, are you telling me that I should die laughing at your ignorance of real financial issues.

Counterpoint: Shana, IDL is investment driven liabilities. Since you clearly know nothing about this concept, you could choose to learn. Perhaps it doesn't resonate with you that if liabilities track to assets in a defined benefit plan, then all of these CFO issues would go away and companies would be able to keep their workers while keeping costs stable.

And, returning to our other cast of characters ...

Point: Dan, you pompous ass, that makes no sense at all. Everyone knows that assets don't drive liabilities.

Counterpoint: Jane, you ignorant slut, suppose they did.

CFO Priorities and Benefits and Compensation

CFO magazine did their annual survey of the priorities of chief financial officers recently. I read their article summarizing the findings from the survey and considered what this might mean for benefits and compensation.

Before I go on to my main topic, however, I need to bring up a few of the issues that I found near the bottom of the article. Three priorities that the article highlighted were written communication, networking with peers and presenting to large groups. Frankly, these are not just CFO priorities; they should be priorities for every professional in our 2015 world, and I was absolutely thrilled to see written communication in the list.

Returning to the main points of the article, I point out some of the top priorities that are more day-to-day for CFOs.

• Precision and efficiency in cash forecasting
• Budgeting
• Balanced scorecards
• Margins
• Risk management
• Performance management

Additionally, and in many cases perhaps more important, but less relevant for this blog is cybersecurity.

Let's also consider what some of the main elements of traditional benefits and compensation packages look like (with some grouping at my discretion).

• Health and wellness benefits
• Retirement benefits
• Other traditional welfare benefits
• Feelgood benefits
• Base pay
• Short-term incentives (bonus)
• Long-term incentives (often equity)

Health benefits are now essentially a requirement. Either you provide them or pay a fine under the Affordable Care Act (ACA). But, companies have lots of techniques that they can use to control costs. Popular today are high-deductible health plans (HDHP) where oftentimes, companies contribute fixed amounts to health savings accounts (HSAs) to help employees pay for costs up to those deductibles. Among the major advantages of these designs are that companies do a much better job of locking in their costs. In other words, more costs are known and far fewer costs are variable or unknown. 

On the subject of retirement benefits, I'm going to give you a shocker. In matching those CFO priorities, the single worst sort of retirement plan that a company can sponsor is a traditional 401(k) plan with a company match. That's right -- it's the worst! Why is that? In a 401(k) plan, the amount of money that a company spends is almost entirely dependent upon employee behavior. If you, as an employer, communicate the value of the plan, employees defer more and that costs you more. Most companies budget a number for their cash outlay for the 401(k) plan. Very few, in my experience, look at potential variability. One that does and that I worked with on this a number of years ago, estimates that between best case and worst case, that the difference in their cash outlay could be in the range of several hundred million dollars. That is a lot of money.

So, what is better?

Believe it or not, I can come up with lots of rationales (much beyond the scope of this post) for why having a defined benefit plan as a company's primary retirement vehicle is superior to using a 401(k) plan. Understand, I'm not talking about just any DB plan. But, the Pension Protection Act of 2006 (PPA) opened the door for new types of DB plans that either were not expressly permitted previously or, in other cases, that were generally not considered feasible. Think about a cash balance plan using a market return interest crediting rate with plan investments selected to properly hedge fluctuation. Cash flow becomes predictable. Volatility generally goes away. Budgeting is simple. The plan can be designed to not negatively affect margins.

I may write more in a future post, but for now, suffice it to say that this design that has not yet caught on in the corporate world needs some real consideration.

How about compensation? 

Base pay is the easiest to budget for. If you do have a budget and commit to not spending outside of that budget, base pay is pretty simple to keep within your goals. 

Incentive compensation is trickier. While many organizations have "bonus pools", they also tend to have formulaic incentive programs. So, what happens when the some of the formulaic incentives exceeds the amount in the bonus pool? Either you blow your budget or you make people particularly unhappy. There is little that will cause a top performer to leave your company faster than having her calculate that her bonus is to be some particular number of dollars only to learn that it got cut back to 70% of that number because the company didn't budget properly.

Perhaps it is better to assign an individual a number of bonus credits based on their performance and then compare their number of credits to the total number of credits allocated to determine a ratio of the total bonus pool awarded to that individual. After all, isn't the performance of the company roughly equal to the sum pf the performances of individuals and teams? And, if the company has a bad year, isn't it impossible that every individual and team exceeded expectations? Be honest, you know that has happened at lots of companies and the companies don't know what to do or how to explain it.

There is lots more to be said, but I want to keep it brief for now. If you have questions on some of the specifics, please post here or on Twitter or LinkedIn in reply to my post or tweet. And, if you have one of these areas on which you'd like to see me expand in a future post, let me know about that as well.

Frightening Data on DC Plan Ownership

According to an article in this morning's News Dash from Plan Sponsor, fewer families had an individual account retirement plan (defined contribution or IRA) in 2013 than in 2010. However, on the bright side, average account balances have increased over the same period.

What do we learn from this? It's difficult to know for sure, but as is my wont on my blog, I'm going to take a shot at working it out.

Why are average account balances up? Well, the equity markets have performed pretty well over the last few years. Combine that with the fact that there has been time for additional contributions to those accounts and this makes sense. When we combine this, however, with my rationale for the prevalence of accounts decreasing, it may look troubling.

That the number of families with individual account retirement plans is decreasing suggests underlying issues with the economy. What I suspect is that many long-term unemployed or under-employed have had to liquidate accounts that they had a few years ago in order to survive. People laid off from jobs have taken distributions rather than rollovers to live on. I suspect that more often than not, these have been total distributions from smaller accounts. By eliminating some of the smaller account balances, the average and median accounts have grown in size.

That only about 50% of families have individual retirement accounts and only about 65% have any retirement plan at all is not good news for our future economy. How will the remaining 35% live? Moreover, among those 65%, will they have enough to survive in retirement?

The way it looks to me is that for people who are able to fully utilize their 401(k) or other retirement program for their entire working lifetimes, retirement may be comfortable. But this data suggests that this will be a substantial minority. For the rest, the retirement system is failing us.

30 years ago, defined benefit (DB) plans were the bulwark of the corporate retirement system. After years of Congressional meddling, many employers consider DB plans to be impractical. At the same time with further emphasis on individual responsibility, the burden of providing a retirement benefit has been shifted largely to employees.

If you are good at Googling or Binging, you can easily find projections from lots of smart people showing that a good 401(k) plan will be sufficient for responsible employees to retire on. In my opinion, most of these projections are deficient. You just don't see projections that consider leakage including:

• Unemployment for a meaningful period of time
• The necessity to take a job for a short or long time that does not have a savings plan
• Increased cost-shifting of all benefits to the employee which may reduce an employee's ability to save
• High-deductible health plans which force employees in many cases to pay significant amounts out-of-pocket for health care

This data is frightening. The retirement system is severely broken. Too many times, the public policy behind the retirement system has been abused by tax policy. We are left with retirement plans being a toy for Congress to make bills seemingly budget neutral. 

The ability to retire is part of the 21st century American Dream. This data suggests that the retirement part of the dream may be just that -- a dream.

Not pretty ...

On Surveys, Data, and Other Common Misconceptions

Every so often, I feel the need to talk about things that are wrong. Well, perhaps I do that more than every so often, but I do it to varying degrees. Here I am going to focus mostly on surveys and their data. I'm not going to cite anything in particular, though, so you'll just have to trust me that  I am not making it up.

I have seen the data from lots of surveys that purport to tell us what are the most important elements to making a job desirable. I have read all sorts of things about mentoring, how green the workplace is, whether the health benefits are good, and the amount of focus put on learning and development among other things. These are all very important, but ...

When someone leaves a job voluntarily, ask them why they left. I have very rarely heard someone say they are leaving to go elsewhere because the new company has a great mentoring program, they are a green company, the health benefits are better, or the focus is on learning and development. Far more often, I have heard one of these:

• I got a big pay raise
• I hated my boss and I had to get away
• I hated my job and or the company I was working for
• I was in a dead end job
• I don't have to travel as much
• I get to travel more

What this tells me is that something about the surveys is just wrong. And, I don't think it is the inability of the people who report the results to accurately compile or report the data. I think it falls under GIGO.

GIGO, you say? What is that?

Garbage in, garbage out!

Surveys as a group, are horribly constructed. Correction, it would be an improvement on most surveys if they were horribly constructed. Most are worse than that.

If we consider job/pay/benefits related surveys, what would you think of a question like this: "How important to you are your health benefits?" Well, of course, they are very important.

So, since everyone says they are important, this gets construed as being one of the keys to hiring and keeping good employees. But, you rarely hear about employees choosing a particular employer or failing to because of the particular health benefits. The question has always been whether they offer health benefits. Very few people ask specifically what they are, how much they will pay for them, or what is included or excluded.

We could say similar things about retirement benefits. You need to have a 401(k) plan to compete. But, if it's a bad plan, nobody ever leaves specifically because of that. Yet, if you were to read survey data and reports, you would think that the quality of a 401(k) plan was a top 3 attraction and retention tool. I will say, however, that employees will think twice before leaving a company with a great retirement program, especially if they have a defined benefit pension plan. It is a retention tool and it is a differentiator.

Okay, rant over for the day. 

Why 401(k) Plans May Not Be the Answer

Get a job. Find a new employer. Typical questions that get asked include compensation, health benefits, vacation, and do you have a 401(k) (or all too frequently, do you have a 401?)? Prospective employees usually don't ask about the 401(k) plan or about any other retirement plan, but simply want to know if there is a 401(k). Does it have a matching contribution? People don't ask.

According to a study from Aon Hewitt, 73% of those eligible are participating in 401(k) plans, but 40% of them are saving at a level below the full match level. Many of those plans have auto-enrollment, but that level of deferral is below the level required for a full matching contribution. Once people are enrolled at the automatic level, many tend not to defer enough to get a full match.

The Aon Hewitt study does not, as far as I could tell, explore why this may be. Is it a lack of employee education? Is it an inability to budget for a higher amount, especially in a time where costs of raising a family are increasing, but pay often is not? Is it a fear of the plan?

We can do the math. If a young worker (someone recently out of college, for example) participates in a 401(k) at a meaningful level throughout their career, and especially if there is a good matching contribution to go with it, those workers can eventually retire with a very good retirement income.

But, what about the ones who participate at a lower level, so that they get less than the full match? What about the ones who face temporary unemployment as so many of us do these days and may have to withdraw their 401(k) for funds to live on?

As Roth 401(k) plans have become the rage, this has become even more of a problem. While in a traditional 401(k), access to funds is essentially limited (large tax penalties) prior to age 59 1/2, in a Roth, that inaccessibility largely disappears after the employee money has been in the plan for 5 years. This means that practically speaking, Roths, for all their benefits, may be less retirement plans than their better known predecessors.

If these trends continue, 401(k)s in any form will not be the answer. In fact, for those people who are not using their plans to the fullest extent that they were intended, retirement may be nothing more than a pipe dream.

35 years ago, the answer was defined benefit plans. They provided retirement income pure and simple. But, do to Congress' ongoing efforts to protect pension plans, or so they would have you believe, that dinosaur is nearly extinct. But, 401(k)s will do the trick for only a small percentage of the workforce. For the rest, retirement planning is imperative. And, when they do the modeling, they may not like the future that they see.

If We Only Knew What 401(k) Participants Really Want

I read an article this morning called "What Participants Really Want From Their Bond Fund." It was written by a gentleman named Chip Castille. Mr. Castille is the head of the BlackRock US Retirement Group. As such, Mr. Castille is likely a participant in a 401(k) plan, although to be truthful, I don't even know if BlackRock offers a 401(k) plan to its employees.

More to the point, the article tells us what participants really want in a 401(k) plan and specifically in a bond fund in such a plan. While I could not find where the author cited any survey data, either he has some on which he is basing his conclusions or he is divining the answers because he seems to really know better from my read of the article (more on that later).

The author implies that participants are looking for safety, return or retirement income. That is a pretty broad spectrum. But, he doesn't dig into it enough for us to know how a plan sponsor or an investment professional would decide. What he does do is point out that an investment manager in a bond fund looks at how closely his fund is tracking a benchmark while participants look at whether the fund has gained or lost money or it will produce sufficient income.

I don't mean to demean what any professional says. But, here I beg to differ with the author. Participants get a lot of junk in the mail these days (not that these days are really any different from any other days in that regard). If the participants to whom he is referring are anything like the ones that I know, they don't look at individual fund performance very often. In fact, in the case of most that I know, "not very often" is spelled N-E-V-E-R. That's right; they don't look at individual fund performance. They look to see how their total account is doing. They judge (that's spelled G-U-E-S-S) whether it's a good day to be in equities or a good day to be in fixed income and periodically move their money around because they think they know.

Typically, participants don't like losses in their accounts. In fact, I would say that if you were to rank account balance events in order of importance, my guess would be that far more participants would say that they would like to avoid meaningful losses perhaps at the expense of a few big gains than the number who would say they would like to go for big gains at the potential expense of taking some very large losses.

But, I'm just guessing. I don't really know. And, frankly, the author of the article doesn't know any of this either. Face it, he hangs around with investment professionals. Investment professionals are not representative of your average garden variety 401(k) participants.

I happen to be an equal opportunity dumper, however. While I cannot find data that the author is using to draw his conclusions from, I will also take this opportunity to dump on many authors who do use data, usually from surveys.

Let me show you why with an example. Suppose a survey question is worded like this:

What do you want from your 401(k) bond fund?

1. Safety
2. Return
3. Retirement income
4. Guacamole
5. Health care

I've never posed this question this way, so I get to guess at hypothetical results. Some number of people will answer with 4 or 5. Among those who don't, that is, they answer with 1, 2, or 3, or they just skip the question entirely, do they know what I mean by each of 1, 2, and 3? My guess is that they don't. Safety has lots of meanings in life. To an investment professional, it means one thing. To a plan participant, it might mean NEVER losing money. You and I know that is essentially impossible in a bond fund, but the average participant may not.

Some firm out there that wants to prove their own point will have a survey question like this one. They will ask about 1,000 random selected people to answer the questions and some smart people in the proverbial back room will analyze the answers so that the author of the next great white paper will have the definitive solution. 

Suppose the potential answers were flip-flopped (that is, health care was at the top followed by guacamole with safety last), would that change the results? What does a participant do if they wanted to answer none of the above? Or, suppose they don't understand one of the answers. Or, perhaps, in their mind, it's a tie between two answers. Or, maybe last week they would have answered return, but after they got their most recent statement and saw a 10% decline in their account balance, they suddenly place significant value on safety.

Let's face it, none of us know what the average participant wants in a 401(k) bond fund. We don't even know what an average participant is. 

Remember the two words that I capitalized -- NEVER and GUESS. That should tell you something.

The Hidden Side of Health Care Costs

I'm not always a fan of Employee Benefit Research Institute (EBRI) reports, but this one resonated with me. 61% of workers report an increase in health care costs. But, the bigger story is that most of them say that this increase is affecting them in other ways. In these days of half the political world touting self-reliance and the other half touting the government providing for all, this survey through my lens says that neither works on an island. We need a bit of both.

So, what does the report say? It tells us that among the 61% whose health care costs are increasing (I am reading that health care costs for this purpose are the sum of premiums and out-of-pocket costs), as a result of this:

• 32% have had to decrease the amount they are saving for retirement
• 57% have decreased the amount they are saving for other purposes
• 22% are having trouble paying for necessities such as food, heat, and housing
• 38% are struggling to pay other bills
• 1/3 have seen increases in credit card debt
• 27% have essentially drained their savings
• 16% have had to borrow money

If I were on one side of the aisle (in Congress) or the other, I would say (you know which side comes down where on this one):

• This is exactly why we need the Affordable Care Act (ACA, PPACA, ObamaCare)
• Forcing people to have what the government deems the proper health insurance cannot work

Let's consider what is happening though. When I was in my teens, oh so many years ago, most of the adults around me were retiring in their late 50s or early 60s. They looked forward to their golden years. They had defined benefit pension plans. Now, unless they are among the particularly fortunate group, their means of saving for retirement is a combination of a 401(k) plan and whatever they can save on their own. Ask these people when they plan to retire and most will laugh at you. They cannot see that on the horizon.

Also, back in my teens, by the time people retired, they owned their homes free and clear. Now? A recent survey that I read (sorry, I can't find the link) informed me that at age 65, more than half of homeowners still have a mortgage and for many of them, it has a very substantial balance.

Whatever the reason, and that's for a different day and a different post, we need some real changes. In the credit card era, people lose track of what they owe. And, much like the federal government, it's tough to make a dent in that when so much of your income is used for debt service. Unlike the federal government, however, the average guy on the street just can't borrow money at interest rates from 0% to 4%. No, your credit card company probably charges you some amount in excess of 10%.

Do I have the answer? No, I don't. If I did, you would hear me screaming it far and wide. But, in a day when take-home pay for many Americans is decreasing (higher taxes, higher employee cost of benefits) and the cost of goods, services and debt service is not, it gets really difficult for the economy to grow.

To me, this is the ultimate hidden side of health care costs. Because of the increases in personal costs of health care, the non-health care side of the economy is stifled.

We need change, but I don't see that kind of change-a-coming.

Attracting and Retaining -- The Role of Employer-Provided Health Care

I read the results of what I found to be an interesting survey this morning. The ADP Research Institute did a survey entitled "The Role of Employer Benefits in Building a Competitive Workforce." The good news about the survey summary is that it provides some excellent insights related to employer-provided health care benefits. The bad news is that either that's all the survey covered, or that's all the authors of the report found interesting.

In any case, according to the survey, nearly half of employers think that the health care benefits that their company provides to employees can be a differentiator when it comes to attracting and retaining employees. Fewer than 10% think that the health care benefits they provide are not particularly important in this regard (smaller employers are far more likely to say this).

Similarly, nearly half of employers think that the health care benefits that they provide to their employees are better than other companies in their industry. Only about 10% think they are worse.

Once upon a time, I was a student of high-level mathematics. I taught math at the college level. I passed actuarial exams on mathematical topics, generally with high scores, on my first attempt. The math here just doesn't work.

Perhaps when one becomes an HR leader (respondents were intended to be HR leaders), one is awarded with a pair of rose-colored glasses. If I were to take a similar survey, but ask employees rather than employers, I think that more than half of employees would say that their employer's health care plan is worse than average.

Why? Frankly, most plans have gotten worse for employees in recent years. Co-pays have increased. The employee's share of the premiums has increased.

I'm not saying that I can blame employers. Health care inflation has far outstripped general inflation and many companies, especially in a weak economy, cannot afford to pick up the inflationary increases in costs.

All that said, I am going to draw my own conclusions. I do this based on a single data point; that is, I draw it based on what I have learned in recent years by being in a health plan, talking to other people in health plans, talking to employers who sponsor health plans, and reading survey results like those from the ADP Research Institute.

In most job classifications, the primary differentiator in influencing a potential employee's decision to work for a company or not is compensation -- cash and cash-like (think equity compensation). Beyond that, it is the impression that the potential employee has gotten about what it's like to work for the company. If it's a great place to work, pay matters a little bit less. If it's a horrible place to work, you have to pay a lot. After that comes benefits. But, think about it. What do most potential employees ask about a benefits program before taking a job?

• When do I get health care benefits?
• Do you have a 401(k) plan that I can participate in?
• How much vacation time do I get?
• How much sick time do I get?

Most potential employees are not sophisticated enough to ask about the health care plan design. Even if they ask, they probably won't understand the answer. Many employees think all 401(k) plans are the same (I never believed this, but I started asking people and that is what I learned). 

Where I think that the difference in health care plans is large is in retention and in word-of-mouth recruitment. If a company has a great health care plan, its employees will talk to their friends about it. They will not be inclined to leave the company and give them up. On the other hand, if the health care plan is not good, water cooler talk will predominate. This may actually cut into productivity and those employees will certainly not recommend the company to their friends.

It's a tangled web, and clearly, HR leaders have not figured out how to untangle it. It's just my opinion, but in my blog, my opinion gets to be front and center. If your opinion is different, leave a comment, or write your own blog.

New Trends in the 401(k) World

Shortly after the passage of the American Taxpayer Relief Act of 2012 (ATRA), Aon Hewitt did a pulse survey of more than 300 large employers (presumably from their client base, but the press release doesn't seem to specify) on 401(k) plans. Here were some of their key findings:

• 49% of respondents currently do not offer Roth provisions
• Of those, 29% are very likely or somewhat likely to add Roth provisions in the next 12 months (this would bring the percentage who do not offer Roth provision down to about 35% of the total)
• Of the new adopters, about 76% will add in-plan conversion (from traditional to Roth) features
• Approximately 53% of companies that currently allow Roth contributions but do not currently offer in-plan conversions will begin to allow them

Personally, I am pleased to see this trend. For the life of me, though, the only good reasons I can see to not offer both of these features are these:

• HR has too many other things on their plate and implementation of these is not a high enough priority to implement in 2013
• The company is particularly paternalistic and worries that because Roth accounts have earlier distributable events than traditional 401(k) accounts that participants will not use them for retirement
• Employees have not asked for them (I think this is not a good excuse because many employees will not have heard of the opportunity)
• Employers have not heard of these changes (shame on them, they should be reading this blog, of course)

The employer-sponsored retirement plan world has changed from one largely of employer responsibility to largely one of employee responsibility. For employees to someday retire, since very few who don't save in employer-sponsored retirement plan save elsewhere, those employees will need to begin saving at young ages and save responsibly and consistently. The more tools they have available to them, the more likely they are to do it, and that is good for our future.

CDHPs -- Perhaps I Was Always Correct

It's been more than one year since I wrote my not exactly seminal piece on Consumer Driven Health Plans (CDHPs). In it, I said that insureds forego lots of important medical care, not because they are making a well-considered consumer decision, but because they simply can't afford it. While I don't think anyone posted in the comment section of my blog, several experts told me privately how misguided my thoughts were. They told me how quality of care is increasing as consumers of medical care make wise choices.

Now we have a study published by the Rand Corporation working with researchers from Towers Watson and the University of Southern California. The way I read it, even if the quality of care, when care is sought, is improving, necessary preventive care is sought less often. In my opinion, it's because of one of these factors:

• Consumers can't afford to pay the costs.
• Consumers have experienced too many situations in CDHPs where they thought a particular test was covered by their plan as part of well care, but either it's not or it's not fully covered.
• Consumers have no idea if they can afford the costs, but dealing with the health plan's "Customer No Service" Department is just too painful.
• Their physician can't figure out whether the test is covered.

From the same study, reading from Figure 4, we see the following reductions in preventive care under CDHPs:

• 3.7% for Glucose Level
• 4.2% for Lipid Profile
• 4.9% for Cervical Cancer
• 2.8% for Mammogram
• 2.9% for Colorectal Cancer

I am not saying here that the CDHPs, in an of themselves cause these declines in preventive care, but there certainly does seem to be a correlation. Personally, I know that I am entitled to one physical per year under the employer-sponsored CDHP in which I participate. Frankly, I've been in a plan of that sort for most of the last 6 or 7 years. Of the tests listed above, some are fully covered by the plan, some are partially covered, and some don't seem to be covered at all. 

I don't recall which one it was, but for one of those tests, when I called the health plan, I was told that reasonable and customary (R&C) costs were covered. After they paid R&C costs, I was left with a $200+ bill.

Is my physician particularly expensive? I don't think so. He is an in-network provider. Am I in a particularly high cost of medical care geography? I'm pretty sure that's not the case. Did I do something wrong? Not that I can tell.

The good news is that I am in a pretty well-paid profession and I can afford my share of the costs of these tests. But, especially in a bad economy, many people can't. 

The evidence tells me that CDHPs are not working the way they are intended to. But, employer costs are coming down. So, we are probably stuck with these plans. Lucky us.

Don't Overestimate the Value of Survey Data

I saw some interesting data this morning. According to their quarterly Retirement Pulse Survey, Charles Schwab found that 35% of investors consider protecting their retirement assets more important than increasing them. Conversely, 8% believe that increasing them is more important than protecting them. What about the other 57%?

Unfortunately, the write-up that I saw has only sparse data (not a Schwab write-up, so I am specifically not placing blame on Schwab).

In any event, the headline from the Plan Sponsor News Dash was "Americans Most Want to Protect Retirement Assets From Risk." While that may be true, the data is not conclusive to this. 57% gave some other answer and I don't know what those answers are.

One can easily rationalize. Older plan participants probably fall into 3 categories:

• Those who feel their assets are or will be sufficient to retire
• Those who think they are close to where they will have sufficient assets to retire
• Those who either think or know that their assets will not be sufficient to retire

That final group needs to increase their assets. There are exactly two ways to do this: save more and get better returns. Being risk-averse just won't cut it. This is not me advising them, this is common sense. 

The News Dash write-up suggests to me that younger plan participants are more risk-averse. Could this be because they have not seen the big market booms in their investing lifetimes. As an investor, even in good times, the 2000s have not been pleasant. While there have been lots of good months, there have been lots of bad months. At this point in my life, volatility is not my friend.

So, going back to the data, taken in chunks, it could be misleading. I would hope that without closer review that plan sponsors don't put too much credence in the headline.

However, would it not be worth it for a large plan sponsor to learn the attitudes of its own plan participants? Are they risk-averse? Or, are they risk-takers? Shouldn't the fund lineup be commensurate with the goals of plan participants? If it's stability they want, shouldn't the plan's Committee have a lineup with a higher propensity of lower volatility options? Conversely, if the company has a bunch of natural risk takers, is it not appropriate that the find lineup be reflective of that?

Perhaps? What is the role of the Committee? Ultimately, they are to act in the best interests of plan participants. Nobody knows exactly what that means. But, it seems to me that meeting the needs or perceived needs of plan participants is not contrary to that role.

So, don't overestimate the value of broadly available data. I suggest you collect your own.

Another Sub-Par Year for Target Date Funds -- What to do Now

The S&P 500 gained about 2% during 2011. The Barclay's Aggregate Bond Index had an increase in the neighborhood of 8% for 2011. According to a Morningstar survey as reported by the Wall Street Journal, the average 2015 Target Date Fund (TDF) lost nearly 1/2 of one percent during 2011. To state the obvious, that's not good. At the end of this article, I'll give you one take on a solution. Until then, we look at the problem.

What's going on here? Shouldn't a plan participant within five years of retirement expect to do better? Or, are the funds in the 2015 TDFs allocated so as to avoid any significant losses at the risk of giving up the upside?

I am not in a position to analyze the contents of every 2015 TDF out there. I know about a few of them from having looked at prospectuses, in some cases because I had the opportunity to invest in them myself. But, I have also discussed the makeup of some of these funds with people who either sell them or manage the investments.

DISCLAIMER: What I am discussing below here are purely generalities about the TDF market. I am neither condemning nor endorsing any particular TDF. Further, my comments don't reflect information about any particular TDF. What you read into what I say is at your own peril.

Whew, it feels good to get rid of that disclaimer. I hate those things. On the other hand, I don't want to get sued for making an innocent statement that gets taken the wrong way.

First off, most of the large TDFs are proprietary funds of proprietary funds. What does this mean? Well, suppose you are invested in a TDF offered and managed by WSWAARGIC (that's We Say We Are A Really Good Investment Company for anybody who was wondering where the firm got its name that just rolls off the tongue). We will call them WSW for short. Take a look inside the WSW TDFs. Each one uses WSW equity funds and WSW fixed income funds. In fact, 100% of the assets in the TDFs are actually in WSW funds.

Now, we all know that WSW is a good money manager. We know this because our employer wouldn't have chosen them if they weren't really good. Just how good is WSW, though? In looking a little bit deeper, we see that the WSW 2015 Fund is invested in 7 distinct asset classes through 7 WSW funds. Of those 7 funds, 4 have been top quartile over the last 5 years. That's pretty good. Another 2 have been in the second quartile over that period. That's not bad. But, the seventh fund has been in the bottom quartile. It's the so-called Core Bond Fund and it makes up a good portion of the allocation for the 2015 Fund. The problem is that WSW doesn't really have a fund to replace it in the TDF and WSW insists that this is a short-term blip and the Core Bond Fund will improve.

As someone who plans to retire in three or four years, how do you feel about this? I'd bet that you wish they had worked out the Core Bond Fund problems outside of the TDF and replaced it with some other company's core bond fund.

But, most TDFs don't work that way. The managers tend to look for what they think are the best available investment options WITHIN the proprietary group of funds. Some observers think that they may not even be looking for the best, but just the most expensive, but I'll leave that for the reader to decide.

I'm going to go under the assumption that if you as a plan sponsor are using a TDF as your qualified default investment alternative (QDIA) that you think it's the right choice as a QDIA. Even so, are you in the right TDF? Suppose that instead of a proprietary TDF, you had a custom TDF consisting of (we'll use 7 as the number again) seven funds in seven asset classes where all seven funds were relatively low-cost, yet historically high-performing funds that have not had recent manager changes or other disruptions. These funds exist. Morningstar might call them 5-star funds. With this TDF, you would need someone to help you set it up, manage it and rebalance it, but all that can be done. From a participant standpoint, they would get better funds for lower fees ... and isn't that what a 401(k) plan is supposed to provide?

Another Survey Says

The benefits community in the US loves surveys. Large consulting firms love to do surveys. Presumably, their clients like this information, or at least someone thinks they do. The benefits news consolidators (you know, the publications that scour the internet for benefits news for a daily newsletter) love to tell us about these survey results.

This is all good. Or, at least, this could all be good. These surveys, though, have their problems.

• Questions are often poorly worded
• Possible answers either cover too much territory or not enough territory
• Press releases summarizing survey results seem to disassociate cause and effect
• Survey populations may not be unbiased
• Surveys inevitably are constructed to produce the findings that the surveyors think should be produced

Questions are often poorly worded

This is a no-brainer, but the world at-large doesn't seem to mind. I saw a survey question recently (the group had not been bifurcated yet into people who liked versus those who disliked their consumer-driven health plan (CDHP)) that asked "What do you like best about your consumer-driven health plan?" The possible answers were something like:

     a. my quality of care is higher
     b. it costs me less
     c. I can choose my own physician
     d. it promotes a culture of wellness

My immediate reaction is to ask where is e: none of the above? Let's look at the possible answers. Anybody who says that their quality of care is higher under a CDHP must be hallucinating. What would make it higher? If you can choose your own physician, why would they provide better care when you are in a CDHP than they would under a traditional health plan?

If you say that it costs you less, I would ask you less than what. Yes, the premiums are lower than they would be in an HMO, for example. On the other hand, they are higher than they would be if you had no insurance at all. Isn't this like having a deductible on an automobile insurance policy? If you choose a higher deductible, your policy costs less. But, in the health care policy, you usually don't get to choose your deductible. And, in the case of high-deductible health plans (HDHP) which are typically the cornerstone of CDHPs, the deductible is typically higher than most people can effectively budget for.

If you say that you can choose your own physician under a CDHP, that is true, but can't you choose your own physician under any health plan? It's true that your care may not be covered by the plan, but for many people, if that is really the reason they are in a CDHP, I would say that they are quite misguided.

Do you really think that CDHPs promote a culture of wellness? If I were texting, I would reply "lol." According to a recent Aon Hewitt survey (oops, now I am citing a survey), 35% of participants in CDHPs are sacrificing medical care because they cannot afford their part of the cost under these plans and 28% are postponing it for financial reasons. FACT: that is not indicative of a culture of wellness.

Suppose I think the CDHP that I have been forced into just plain sucks. How do I answer this question?

Answers cover too much or not enough territory


In the last section, I managed to deal with answers that don't cover enough territory. Sometimes, they go the other way and cover too much.

I took a survey recently about automobiles. The survey asked me a series of questions. For each question, I was supposed to answer on a scale of 1-13, with 1 meaning I strongly disagreed and 13 meaning I strongly agreed. Come on, people, 1-13? Do they really think that ten minutes into a survey, I can rate things on that fine a scale. They asked me if I would consider buying a Lexus when I next purchase a vehicle. So, perhaps I went through a train of thought like this. Lexus makes a very good car. They are stylish, safe, high-performing, and dependable. They are also expensive. Would I consider buying one? Yes, I would probably consider it, but I really don't want to spend that much money on a car, so how strongly would I consider it? Hmm, is that a 5 or a 6 or a 7 or an 8 or a 9 or a 10? I don't know. If it was on a 1-5 scale, I could probably happily fill in the little button for a 3. But on a 1-13 scale, that would be equivalent to a 7 and I just don't know if I'm a 7 or not.

Press releases ignore cause and effect


I saw another survey (if I could find the actual survey again, I would cite it here) recently that said that fewer companies were funding (informally) their nonqualified deferred compensation (NQDC) plans. The headline said something about recent guidance on corporate-owned life insurance (COLI) being the reason for this. Hmm, the survey had no questions in it about why fewer companies were funding their NQDCs. And, further, I'm not sure what recent is, but I can't find any recent COLI guidance that would affect funding of NQDC plans. Perhaps the authors of the surevy had a bias?

Survey populations may not be unbiased


Suppose a large consulting firm does a survey. In my experience, they send the survey to a nice cross-section of large companies. Perhaps it looks something like the Fortune 200 plus all of that firms clients not in the Fortune 200 that generate at least $1 million in annual revenue for the firm. Of the companies surveyed, who do you think are the most likely to answer the survey? Could it be the consulting firm's large clients? Aren't they the ones most likely to actually open the survey? Who are least likely to answer the survey? Could it be the companies that have recently fired that large consulting firm?

Do you think that the results of this survey might be a little bit skewed? Do you care? I do.

Surveys inevitably are constructed to produce the findings that the surveyors think should be produced


Suppose you ran the health care consulting practice at a large consulting firm. Further suppose that you are a big proponent of consumerism. In fact, you have built your consulting firms health care consulting practice around CDHPs. You ask your survey group to do a survey around health care plans. You want to be able to make a bold statement in a press release that shows how wonderful CDHPs are and for all the reasons that you have been touting.

Do you think you will make sure that the questions have at least a small bias that will lead to your desired result? If the findings come back differently than you had hoped, do you think you will publish the results as is, or will you find a way to tweak the results? Will you tout the portion of the results that support your practice or will you be unbiased in how you release the survey results?

I don't need to answer those questions for you. You don't need to answer them either. We all know the reality.

These surveys ... they do have their problems.

And the Survey Says ...

I read the results of a survey on defined contribution (DC) plans this morning. Among its findings was that participants understand what the number/date in the name of a target date fund (TDF) means. I don't want to call out the name or author of the survey here because it did have some good information. What I do want to cite is that the conclusions may not be as valid as the authors suggest.

I'll bet you want to know how I can say such a thing. Even if you don't, I am going to tell you. Roughly what happened was that survey participants were contacted by telephone and asked a series of questions. One of those questions was (approximately) asking what the 2030 means in the term Retirement 2030 Fund. Again, approximately, the choices were:

1. The approximate date at which a participant expects to retire and begin drawing down the account balance for retirement income.
2. The approximate date at which a participant expects to retire and roll over the account balance to an IRA.
3. The approximate date at which the participant wants to spend the money freely.
4. I don't know.

Frankly, two of these (1 and 2) sound like good choices. The other two do not. That person could somehow divine one of the two correct answers (1 and 2) from the four choices given does not suggest much about the person. The survey authors seem to think it does.

I think I could have authored the survey in a way that would have shown that nearly 100% of respondents understand what the 2030 means. That's right, nearly 100%. 

I want to change the choices. I'll keep #s 1 and 2 as they are. But, I am going to change #s 3 and 4 to be these:

• The next year that the Cubs will win the World Series.
• The next year that NBC will win the ratings battle against ABC, CBS, and Fox.

See how silly it can get. Everyone knows that the Cubs just don't get to win the World Series. There is a curse, and it is stronger than the one that plagued the Red Sox. And, clearly, NBC is more likely to finish 5th in a 4-horse race than it is to win the ratings battle. 

Or, I could make these choices 3 and 4:

• The year at which a participant will have enough money in their account to retire comfortably.
• The year at which the fund will convert from an account balance to a level annual retirement payout.

Now, my guess is that between 50% and 60% of respondents would get this one right. And, remember, if choices were chosen randomly, 50% would choose either 1 or 2. So, I don't think that respondents really get it.

There is much education still to be done.

Consumer Driven Health Care - Who Are Its Users?

According to a report from the Employee Benefit Research Institute (EBRI), the times they are a-changin' (well, some guy named Bob Dylan said that first). Consumer-driven health plans (CDHPs) have been around for 10 years now. A recent EBRI study notes that in 2005, participants who enrolled in CDHP plans were more likely than those in non-CDHP plans to have income above $150,000. In 2010, more than half of those in CDHP had income between $50,000 and $100,000, but only about 1 in 7 had income over $100,000. Similarly, the study has found that participants who have more advanced education are more likely to be in CDHPs while those with only high school diplomas are more likely to be in non-CDHP plans.

What does this tell us? What should it tell us? Analyses that I have seen suggest that people who are more likely to know or understand what their choices are will enroll in CDHP plans. I disagree. Here is why. The study doesn't compare apples to apples. It doesn't say that each person in the study had a choice. It doesn't say that the choices were available on an equal basis.

Remember, companies often hire consultants to 'price' these plans for their participants. As the companies would often like to steer their employees to the CDHP plans, they instruct their consultants to price the options so that participants are more likely to choose the CDHP plans. Suppose a company offers only CDHP plans. In that case, even I can figure out that all employees who enroll in their company's health plan will be in a CDHP plan.

But, let's dig a bit deeper. Initially, when participants tended to have a choice, they looked at their options. One plan (the traditional) might have had a $500 deductible. The CDHP plan might have had a $3,000 deductible. Well, priced strategically, the $150,000 earner might say that all things considered (premiums plus medical expenses), the CDHP plan would likely cost them less. On the other hand, the $50,000 earner might say that they just can't afford the $3,000 deductible. 

Similar arguments can be made about education. Those with high levels of education are more likely to have higher income. 

The study also tells us that those in the CDHP plans generally have better health status and show better health behaviors than those in traditional plans. Again, is this the result of the CDHPs? Or, is it that those who are in excellent health are those less likely to have significant medical expenses and therefore more likely to opt for the lower premiums in the CDHP?

What the EBRI study doesn't look at are the medical care usage behaviors of those forced into CDHP plans. Anecdotal evidence suggests to me that many who are in CDHP plans against their will postpone medical coverage because they cannot afford it. Will the person who didn't go to the doctor in 2008 because they couldn't afford $2,500 out-of-pocket for the procedure they needed become a $100,000 patient in 2012? We don't know then answer to this, but people that I know tell me that either they or their friends have fallen into this category.

So, the people in the CDHP plans are who they are. Frankly, I don't think we really have a clue why.

Survey Says Employer-Provided Benefits Declining, But Why?

Today's information is gleaned largely from "Prudential's Fifth Annual Study of Employee Benefits: Today & Beyond." For me, the key takeaway from an employee's standpoint is that 43% of employees said that the level of benefits that their company offers was down from a year earlier. This continues a trend that we have seen for the last few years. Pay increases, generally, are meager. What employees have to pay for equivalent benefits is increasing faster than pay. The end result is that an employee's income that is used to other than the necessities of life is shrinking.

Here I diverge from the theme of the survey. We've been down this road before. Employer-provided retirement benefits are decreasing. Defined benefit pensions, once nearly as prevalent as mom and apple pie, are now barely more common than the dinosaur. Cost-sharing in what are considered by most to be core benefits, such as health care, has increased on the employee side. And, all this has occurred while the level of benefits being provided is declining.

Once upon a time in a far-away land (oops, not so far away, but actually right here in the US), companies used to talk about the "deal" between an employer and an employee. The employee would work hard, but frankly, perhaps not as many hours as employees seemed to be working through the period from about 1985 to the early 2000s. In return, the employee would get fair pay with fair pay increases and certain core benefits (retirement and health care primary among them).

What ended this? From this lens, it appears that the beginning of the end was the bursting of the tech bubble. The recession of the early 2000s brought with it a rash of cuts in employee benefit programs. Companies looked for new ways to save money and such benefits were among the primary targets. Initially, we were told that such cuts would be temporary, but temporary is long since gone. That train has left the station.

Frequently, I rail on against those who choose to over-regulate things like executive compensation. But, if we look carefully, it is really only the executives whose total reward package has value that has kept up with or exceeded increases in the cost of living.

I think there is one reason for this that has not been discussed much. It's one of the OBRA brothers, in this case OBRA 93. It added Section 162(m), the foolish million dollar pay cap to the Internal Revenue Code. But, it exempted performance-based pay. And, while this was designed to rein in executive compensation, what it did is it allowed companies and their compensation consultants to design programs with obscene amounts of performance-based pay for top executives. So, executive pay went up, and it went up with the incentive attached to it that if the executives could increase corporate profitability by cutting employee benefits, part of that savings from cutting benefits would go right into the checkbooks of the executives.

So, for all the people in the early 90s who tried to rein in executive compensation, they really found a back door way to cut broad-based employee compensation and benefits. The Prudential survey doesn't say it, but I do.

And so it goes ...

Funded Status of Corporate Pensions Improves Due to Increased Funding

Each month, Mercer does an analysis of the funded status of pension plans sponsored by S&P 1500 companies. Based on the Mercer study, the aggregate funding deficit as of March 31, 2011 was about $213 billion, down from $256 billion a month earlier. Mercer said that one of the primary reasons for this smaller deficit is that pension plan sponsors continue to make significant contributions to the plans. This is especially true for corporations with high quality debt where the current extremely low cost of borrowing for these companies has caused many to choose to borrow to fund up those plans. Also notable in the Mercer study is that the aggregate funded status for the same plans increased from 81% to 87% during the 3-month period ended March 31, 2011.

What's going on here? While I haven't had the opportunity to discuss this issue with all of the finance heads, many of whom are presumably the ones who are making this decision, let's consider a very plausible rationale. Suppose you sponsor a pension plan that is underfunded by $100 million. In simple terms, this leaves you with a $100 million liability on the balance sheet. Now, if you turn around and borrow that same $100 million (or some piece of it) at today's very low rates, you 'move' the liability on the balance sheet from the pension plan to more standard corporate debt, and you do it a low rate.

Why might this be good? In and of itself, it might not be, but suppose you use that new level of funding to help de-risk the pension plan. You are now taking what many consider to be a risky, highly volatile (this has been addressed over and over again here and in many other places) liability and replacing it with a stable, less risky liability. In today's world, where risk is bad and risk management is king, this is highly desirable. My employer has been at the forefront of such risk management efforts in pension plans since our inception.

Frankly, it's not just funding that has decreased deficits and increased funded statuses. Equity investments have generally performed well year-to-date and underlying discount rates have remained relatively stable.

I haven't seen the gory details of the Mercer study, but I must wonder to what extent the Pension Protection Act (PPA) funding rules have been behind these contributions as well. With plans being as poorly funded as they have been recently, and CFOs having the knowledge that PPA does require particularly rapid (7-year) funding of the underfunded, might they not be simply opting to throw cash at the plans when the cost of cash is low? Better, perhaps to do it this way, than to fund only when it is required when their borrowing costs may be higher.

So, the large corporate world seems to be getting this under control. If only sponsors of public pension plans could fix their underfunding as easily.

Most Blame Decline in Pensions on Congress

The National Institute on Retirement Security (NIRS) surveyed American workers about their retirement. While I don't find the results of the survey surprising, in general, I did find it interesting how and where the blame for worker's anxiety about their retirement is placed.

Here are some of the highlights of the survey, along with some (probably pithy) commentary:

• 83% of Americans are concerned about their retirement. That is the biggest number that I have ever seen for this statistic.
• 84% say that the current economy is an impediment to their preparations or their ability to prepare for retirement. While this is surely true, this is the first period since the passage of ERISA where employer-provided retirement benefits have been cut so drastically at the same time as the economy has plummeted. In previous recessions (although the recession of about a decade ago foretold how employers would likely react to this one), employer-provided retirement benefits have been much more sacred.
• Only 11% of Americans expect their retirement to include things like travel, restaurants and hobbies. On the other hand, 34% will be happy to just get by.
• Nearly 90% of those surveyed believe the US private retirement system is flawed.
• 77% are of the opinion that the downfall of pensions has made it harder to live the "American Dream."
• Roughly 80% of Americans think Congress doesn't understand how difficult it is to prepare for retirement, while a full 80% think that Congress needs to do more to help Americans to be able to prepare for a secure retirement.

I find the last bullet most interesting. 37 years ago, after many years of debate and revisions, Congress passed, and President Ford signed into law ERISA. That was the dawning of the golden age for pensions in America. Not only did the number of employer-sponsored pension plans increase, but those pensions were far more secure than they had been previously. But, we couldn't leave a good thing alone.

Bring the alphabet soup of laws affecting retirement plans to the rescue, so to speak. REA, passed in 1984 raised pension costs significantly. SEPPAA, passed in 1986, made it more difficult to terminate a plan once you started one, and, combined with the Tax Reform Act of 1986, made certain that the surplus in a pension plan belonged mostly to the government in the event that an employer chose to terminate a plan. OBRA 87 added pointless volatility to pension plans. It also signaled the beginning of the era in which Congress showed that it is far better in choosing reasonable actuarial assumptions than people trained (and certified through examination) as actuaries (of course Congress knows more, they know more about everything). Various laws throughout the 90s and early 2000s created further turmoil. And, all along, the accounting profession also tried to lay claim to thinking that it knows more about pensions than the people with specific training. And, finally, we got the worst named law in history: the Pension Protection Act of 2006. It has done more in a short period of time to ensure that the majority of Americans will not accrue a pension than any law previous to it. Yes, it has done a wonderful job of protecting the PBGC, but as I have said before in this blog, rather than protecting private pensions, it has decimated them.

Well, according to this survey, Americans may not know how it happened, but they do seem to know, or at least believe that the fault lies with the Fools on the Hill (Congress). But, they think they fixed the problem.

And, so it goes ...