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Replacing Pensions with 401(k)s

Replacing Pensions with 401(k)s

July 16, 2014

Authored by: Chris Rylands

Frequent internet users are likely familiar with the demotivational posters at, such as this one on retirement.  If a recent study by a partner at the Mercer consulting firm is to be believed, then they should perhaps add another one to the list: switching from pensions to 401(k)s.

Retirement PlanAs reported here, the researcher compared two companies: one that replaced its pension with a 401(k) in the late 90’s and one that did not.  In the company that replaced the pension, the researcher found dissatisfaction by younger employees as older employees remained employed and thus prevented the younger employees from advancing.  As the article notes:

[The replacement of a pension with a 401(k)] affected job mobility “velocity,” Nalbantian found, and the percentage of people moving into new positions, whether vertically or horizontally, stalled at 11 percent. This, in turn, accelerated the exit of more talented people who saw advancement potential evaporating, the research found.

On the other hand, at the firm with a pension, velocity remained at about 18 percent.

This is an interesting data point, but the study has some limitations.  There could be a great many other factors, such as organizational culture, changes in leadership, the availability or lack of availability of other benefits (such as retiree health).  The bottom line: by comparing only two companies, there are a great many variables that are not controlled.


Speaker Boehner’s Lawsuit and the ACA

The CapitolUnless you’ve been hiking Mount Kilimanjaro for the last month, you’ve no doubt heard about Speaker Boehner’s proposed lawsuit against the President.  The Speaker, and apparently many House Republicans, are upset that the President has not, in their view, upheld his oath of office by faithfully executing the laws passed by Congress.

A draft resolution released last week shows that the focus of the lawsuit will be none other than the already much-litigated Affordable Care Act.  Regardless of how one feels about the lawsuit or ACA, it’s impossible to ignore the great irony in House Republicans suing the President for not faithfully executing over a law they’ve tried to repeal some 40 times.

It’s easy to see the political reason, though: the Republicans think it’s a bad law and that the President and Congressional Democrats should have to campaign with its perceived flaws being fully realized.  The President’s delays do not allow that to happen, and effectively insulates him and his party from having to face voters angry over the ACA, in the Republicans’ view.

But the real question is this: what if Speaker Boehner wins?  Set aside the merits, for a minute, and consider that possibility. Take, for example, the “play or pay” employer mandate.  The Speaker wins and now what?  Is the delay no longer effective?  Does that mean that penalties could

Modifying the Affordable Care Act to Make It Better

Modifying the Affordable Care Act to Make It Better

June 25, 2014

Authored by: benefitsbclp

One of my law school professors and now good friends, Professor Burt Brody, has been contemplating beneficial changes to the Affordable Care Act.  I think he is on to something beneficial.

Professor Brody has written an op-ed piece published in the Desert Sun on May 21, 2014.  In the column, he supports the notion of having the health insurance industry participate fully in the correction, and he eschews the notion of “national health care” in its pejorative sense.  Professor Brody, without saying so, realizes that the Act is a health insurance reform act, not truly a health care reform act.

His suggestion is to take the amount that the federal government spends today on health care, and dole it out to everyone with a Social Security card – that’s every legal American – based on age brackets and veteran status that reflects perceived need for  health insurance.  The funds would be used to buy health insurance.  Professor Brody assumes that younger people are going to pay less for health insurance than older Americans, and, based on age cohorts, the amounts would increase with age.  Note that this does not require that there be any tax increase to implement, although there would likely be administrative costs in setting up and running the system, probably through the Social Security Administration since it already has our social security numbers, addresses, and dates of birth.

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With Retirement Policy, You Can’t Tell the Players Even with a Scorecard

The Washington Post reports that Senator Marco Rubio (R-FL), a Tea Party favorite and staunch conservative legislator, has proposed opening the Federal government’s Thrift Plan to all Americans who do not have the opportunity to participate in an employer-sponsored retirement plan.  The fact that a conservative Senator is expressing an interest in expanding government is surely paradoxical and confusing.  But what really comes from this ill-conceived notion is the obvious lack of sound retirement policy in Washington.

According to a recent survey, the number one concern of Americans is not health care or health care costs, it’s not unemployment, and it’s not a failed immigration policy.  It’s having money on hand in a sufficient amount to be able to retire in a dignified and proper manner.  Democrats and Republicans alike don’t seem to get this.

Congress views retirement plan deductions and deferrals as some sort of budget game.  Republicans (see the Camp Tax Overhaul) and Democrats (see the Obama Budget) have recently proposed methods of diminishing savings by reducing attendant tax benefits.

President Obama seems convinced that the current structure primarily benefits the wealthy.   So, in his 2015 budget proposal, he suggests putting caps on retirement savings apparently not realizing that most of the rules pertaining to tax-qualified plans do just that and provide consequential limiting opportunities for higher paid Americans.  Are the President’s proposed caps good retirement policy or simply efforts to enhance the Federal treasury?

And he proposed, and is implementing, the

Mr. Spock, Social Influence, and Eliminating the ACA Employer Mandate

ACAHumans are not logical.  Consider popular Star Trek characters Mr. Spock or Lt. Cmdr. Data (depending on which generation of Star Trek you prefer).  Either by choice or by nature, each was constrained to view the world through the lens of dry, passionless logic.  This predilection made them stand out among their fellow characters who were more, well, human.

Why does this matter?  Well, a recent Robert Wood Johnson Foundation/Urban Institute Issue Brief suggests there would be a very minimal drop (0.3%) in employer-sponsored coverage if ACA’s employer mandate was eliminated.  It would also minimize labor market distortions that the mandate, anecdotally, seems to be creating, the brief says.

But the report fails to consider the psychological impact of the play or pay mandate.  Having the play or pay mandate (or the tax, as the Supreme Court said), sends a message that it is a bad act for an employer to drop coverage.

It’s a version of what psychologists call “normative social influence.” In short, we like to be liked so we will do what we think people want to achieve that goal, even if we don’t believe in it.  This influence goes beyond pure logic, and it is not something that is easily measurable in this context.

My contention is that the mandate is not simply a dollars-and-cents proposition. It also says that the government disapproves (and

401(k) Elbowing Out HELOCs As Rainy Day Fund

Broken Piggy BankAs has been widely reported, Americans have increasingly turned to their 401(k)s to fund emergency expenses.  Of course, withdrawals before 59 ½ are subject to an additional 10% tax.  As this Bloomberg story notes, the IRS collected $5.7 billion from the early withdrawal penalty, which means people withdrew $57 billion early.

As we have said before, 401(k) plans were actually never intended as retirement plans, but as savings plans.  That’s why they allow distributions on hardship and for other purposes.  So if 401(k)s are being used as more or less originally intended, why is this a problem?

First of all, it’s interesting behavior considering so many participants are concerned their 401(k) plans won’t be available to help fund their retirement, as we discussed previously.  By withdrawing early, some participants are turning their fear into a self-fulfilling prophecy.

Additionally, as pensions have slowly (and mostly) faded to black, 401(k)s have become the dominant retirement planning vehicle.  Thus, lawmakers and others have increasingly become concerned with so-called “leakage.”  However, as this behavior shows, leakage is going to happen as long as it’s available.

So what’s the answer?  The article makes this observation:

Congress, retirement experts and administration officials who are concerned about early withdrawals have two suggestions, totally at odds with each other: Lower the penalties or raise them.

Obviously, you can’t do both.  Raising the penalties (or flatly

Americans Running from 401(k)s?

As reported here, the Great Recession apparently has spooked some Americans from relying on their 401(k)s.  As the article notes: 

Before the Great Recession, most Americans said they planned to rely on their 401(k), IRA, Keogh or other retirement savings when they left the workforce, according to a new poll from Gallup. Today, only 48% say they would use these savings in retirement, and numbers have yet to rebound to where they were before the 2008 sell off. 

Respondents said they would be using IRAs, CDs, savings accounts and more, in addition to their 401(k) plans.

This is an interesting result, given that 59% cite having enough money in retirement as a top financial worry. 

Yes, it’s true that 401(k)s, like every other investment-type account, took a nose dive in the Great Recession.  However, this study from the Employee Benefits Research Institute shows that 401(k) balances were actually higher as of the end of 2011 than they were pre-recession.  Yes, some of that is due to additional contributions, but to say the numbers “have yet to rebound” is not accurate.

Invest button

The results also bespeak a misunderstanding of proper retirement savings.  It is possible that this seeming disconnect is the result of a lack of understanding on the part of participants – understanding of the need for long-term investing to retirement, the markets, the tax  law, the benefits of pre-tax savings, the opportunity presented by

As Different as Night and…Later That Night


In one episode of Friends, Rachel, after breaking up with Ross (the paleontologist, played by David Schwimmer) started dating Russ (a periodontist, also Schwimmer).  The two Schwimmer characters, who may as well be clones but for their different spheres of employment, are sizing each other up in an exchange in the coffee shop after which Monica, Ross’s sister, observes ”They’re as different as night and… later that night.”

Monica’s observation is also applicable in comparing employer-sponsored coverage with ACA exchange coverage.  Consider this analysis by Avalere Health examining the data of enrollees in the ACA exchanges.  Of note, they said the following:

Double digit premium increases are likely in many markets in 2014.  Despite initial concerns about the age mix of exchange enrollees, the current age distribution appears to be close enough to plan projections to avoid driving major premium increases. However, secular increases in the cost of medical care and in utilization of services and new medical technology make it likely that exchange plans will need to increase their prices.

This is an interesting observation, particularly in light of the Robert Wood Johnson Foundation study that found that exchange plans had, on average, lower premiums, but higher cost sharing, than employer-sponsored plans.

So how does this tie back to Monica?  Despite some sounds of the supposed death knell of employer-sponsored coverage, a

AOL, ACA, & 401(k)

AOL, ACA, & 401(k)

February 13, 2014

Authored by: Chris Rylands

As was widely reported last week, and subsequently reversed on Friday, America Online’s CEO announced that, due to a $7.1 million cost increase resulting from the Affordable Care Act, AOL was going to change how it made its 401(k) matching contribution in order to offset costs.  In short, AOL would have imposed a requirement that employees be employed on the last day of the plan year to receive the match.  For employees who leave during the year, the match would be $0.  After an employee uproar, AOL reversed course.

AOL was (predictably) being criticized by ACA supporters for blaming the ACA and was (predictably) applauded by ACA opponents as providing further evidence that the ACA is harmful to the economy.  The fact is, AOL is not the first employer to suggest that ACA is increasing costs.  A study done by Deloitte, and reported here, showed that 85 percent of employers said ACA increased costs.  Additionally, a more recent report by the National Small Business Association showed that a third of small businesses surveyed are intentionally not growing due to the increased costs from ACA.

As plan sponsors wrestle with these increased costs, one place they can look to offset these costs (as AOL did) is to retirement plans.  The thinking could be that there are only so many benefit dollars to go around, so it makes sense to rob retirement to pay healthcare.   As a general rule, humans tend to discount risks that are

Changing the Savings Culture by Executive Fiat – The New myRA

Changing the Savings Culture by Executive Fiat – The New myRA

February 4, 2014

Authored by: benefitsbclp

Americans are notoriously poor savers.  Research shows that unless a savings program like a 401(k) plan is offered at the workplace, Americans do not save regularly.  As the retirement savings model has moved away from a guaranteed income model found in defined benefit plans to the requisite self-sufficiency of savings through a defined contribution arrangement, pressure has been placed on the retirement system to make certain that American workers have sufficient assets for a dignified retirement.

In an effort to change the non-saving culture, the Treasury Department, as ordered by the President without the need for Congressional approval, is developing the myRA (my Retirement Account) to give people the opportunity to save in what should be a simple and straightforward manner.  The myRA (and note, Treasury says it is not pronounced “Myra”) is intended to supplement Social Security and other possible savings.  It is not expected to be the primary source of retirement income for Americans.  In many respects, it looks like a payroll reduction Roth account for small savings amounts.

Here are some of the features of myRA as announced by the Treasury Department:

  • Looks and feels like a Roth IRA with the same tax treatment (after-tax contributions, tax-free growth) with annual income eligibility limits beginning at $129,000 for an individual and $191,000 for a couple, both of which will be subject to COLA adjustments.
  • It is a no-load arrangement, i.e., there will be no fees for the investments (although a White House
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