IMHO: Heightened Sensibilities

I was at a conference a couple of weeks ago, when the CEO of a large, national consulting firm stood up and commented on the increased fiduciary burden that the Pension Protection Act had placed on plan sponsors - an obligation to ensure that participants' savings are sufficient to provide an adequate retirement.

Now, in fairness, I wasn’t paying a LOT of attention to him when he stood up.   He wasn’t on the panel, and I was trying to finish taking down some notes from the comments of someone who was.   Nonetheless, I think I got the essence of his perspective—that PPA has created a new level of fiduciary responsibility for plan sponsors—correct.

Even if I missed some nuance in that particular instance (and I wasn’t the only one to hear it that way), I’m hearing that sentiment more and more these days—at least from the provider community.

Now, there are a lot of troubling things in the PPA for defined benefit plan sponsors, though not as bad as many feared, and certainly not as bad now that we’ve had some time to let the markets and contributions restore some of the damage from that not-so-perfect storm (see  IMHO: “Over” Blown? ).   But on the defined contribution side, I have always felt that the authors of the PPA had taken a Hippocratic Oath—choosing first to do no harm.   The PPA took a number of existing design options—automatic enrollment, contribution acceleration, participant advice, asset-allocation funds—took into account all the areas that plan sponsors had expressed concern with over the years (how much to automatically defer, how to invest those contributions, how to return contributions for workers who wanted to opt out but didn’t, how to offer participant advice…), and provided not only a structure, but some safe harbors as well.   Moreover—and IMHO, this is the best part of the PPA on the DC side—they didn’t take away a single design option, just gave us some new ones to work with (see  IMHO: PPA’s Sway ).

New Options

What that means, of course, is that if you like the concept of automatic enrollment, but find that mandatory match a bit expensive—or don’t like the idea of going back and rousing those employees who never signed up years ago with an automatic enrollment notice—nothing stops you from adopting automatic enrollment on your own terms.   You won’t get the protections of the safe harbor—but then, how many plans with automatic enrollment have a problem with passing their ADP test?   If you still prefer (despite all the industry punditry) a stable value fund for the default—or if you just want to use a managed account that’s been put together by the plan adviser—you can still do that, even though you’ll forgo the generous protections afforded the use of a qualified default investment alternative.   It’s as though the good folks in Washington finally realized they were dealing with adults, not crooks—adults who could be trusted to do the right thing(s), given the proper incentives and structure (unfortunately, the DB system wasn’t treated with the same latitude, IMHO).  

However, over the past several months, I have detected a subtle shift in the dialogue about PPA.   People have, in short order, gone from talking about how many people will adopt automatic enrollment to how everybody should—and I figure in another year, some will say everybody “must.”   People talk about how the defined contribution system HAS to change because we’ve lost the protections of the defined benefit system—even though the vast majority of private sector American workers have NEVER enjoyed those protections.   And some people—generally speaking, people in the business of selling retirement plans (though they have agents)—are beginning, in words anyway, to “convert” a plan fiduciary’s obligation to deliver a certain level of benefit via a pension plan to an obligation to ensure that the defined contribution plan fulfills that same goal.  

Now, since I don’t think you can find that obligation in ERISA—or in the PPA—it gets laid at the feet of plaintiffs’ attorneys who will sue the plan fiduciary for an inadequate result, or is rationalized as “best practices” (another term that I don’t recall stumbling across in ERISA)—or, as some surely walked away from that conference saying, “I recently heard so-and-so say….”

I’d like to believe that those who are promulgating the “enhanced” obligation view are doing so for the purest of motives—that their interest lies only in helping ensure a financially satisfying retirement for all.   Still, it seems to me that if they are successful in converting the already daunting fiduciary obligations of a defined contribution program to that of requiring—directly, or by inference—the ensuring of a defined benefit with a DC program, we’ll only do to the former what we are well on our way to doing with the latter.