IMHO: Protect Shuns

August 3, 2005 ( - Last week's Congressional machinations brought to mind Otto van Bismarck's comment that "Laws are like sausages, it is better not to see them being made."

I had just about given up on seeing anything emerge from this session.   Frankly, most plan sponsors I had spoken with would have been just as happy to see no bill as a bad one – and most of them (that is to say, the ones who weren’t troubled airlines) were hard-pressed to see how a “good” one could emerge from what was on the table.

The advice provisions in the House-passed bill will, no doubt, create some stirrings in your world – if enacted – but it is by no means yet certain that it will be.   The encouragements surrounding automatic enrollment programs will almost certainly generate a bit of activity on that front, but I suspect the actual take-up rate will be relatively modest, certainly in the short-term.   The participant information disclosures will probably generate more plan expense than true information.   The sanction of cash balance plan design is certainly welcome – and long overdue – but even that is clarity on a prospective basis, with no real reassurance for plans that have already crossed that Rubicon.

The good news is that most of what was in the bill that the House passed was “anticipated.”   The bad news is that it is generally anticipated to have a bad effect on the large number of still-very-viable pension plans, in the name of purporting to increase disclosure and transparency of these widely misunderstood programs – which, in turn, is designed to stem the tide of pension plan dumping on the nation’s pension insurance system.   It may, in fact, have some impact on the latter – but I doubt it.   Unfortunately, I have little doubt that it, in tandem with accounting changes that the Financial Accounting Standards Board (FASB) will insist on imposing later this year, will accelerate the trend away from these programs.   None of this is new – or news.

These are all incredibly complicated issues, and one should, I suppose, be impressed that lawmakers have tried to deal thoughtfully with such a comprehensive list of changes.   It is difficult, however, not to view the final result with more than a twinge of regret – and I routinely hear from plan sponsors a quiet, simple resignation to what seems to most to be an inevitable conclusion.   More’s the pity.

As an industry, we are almost uniformly in agreement that these changes will condemn defined benefit plans to extinction, certainly once interest rates recover to a place where that action will be financially viable.   As an industry, we are almost uniformly in agreement that workers don’t/won’t/can’t save enough to fund their own retirement, and we seem to share a similar consensus that Social Security’s contribution will be more modest in the future than at present (some would even say much more modest).  

If we agree on so much, perhaps we ought also to just agree that defined benefit plans aren’t well-structured to fit the way we work, or the way the “experts” want to account for such obligations, rather than referring to these kinds of changes as “enhancements” to retirement security.   Because, IMHO (in my humble opinion), while these changes surely protect something – most likely the perceived financial integrity of the PBGC – it’s difficult to see how this “pension protection” act lives up to its name.