A. Impact of Demographics on Retirement
Security
The combination of social, political and economic factors over several
decades contributed to creating a blueprint for retirement security along with
the recognition that a vehicle that would provide a modicum of financial
security for older Americans, once their work life ended and their retirement
began, would do much to thwart the specter of poverty. Over the last four
decades America has experienced a demographic tidal wave of a growing and aging
population commonly referred to as the “age wave” that has in recent times
reinforced and focused national attention on the need to evaluate where we are
today and determine how to continue to provide a secure retirement system for
older people.
B. Three-Legged Stool of
Retirement
Traditionally, the three-legged stool of retirement, Social Security,
personal savings and a retirement plan, commonly referred to as the “three
cornerstones” of retirement income, has been promoted as the most effective
combination to provide a secure retirement.
All three -- Social Security, a pension plan, and personal savings -- can
most effectively support and strengthen the three-legged stool. Unfortunately,
each of these cornerstones is in various stages of serious threat of erosion in
one form or another and has been characterized as America’s looming retirement
security crisis. The need for education with regard to savings, pensions and
long-term retirement planning is of paramount importance. Our failure to address
this crisis portends for serious long-term societal ills.
C. Social Security
For the past two decades various pundits have articulated that we face a
crisis and some predict the potential insolvency of the unreliable
“pay-as-you-go” Social Security system. They argue that a result of the alleged
inadequate funding, and unrealistic investment objectives as well as the
impending retirement of the baby boom generation, and the dramatically shifting
top heavy demographic landscape in our nation which will place the burden of
entitlements onto the younger generation, our Social Security system is
seriously threatened.
D.
Trends in Personal Savings
The personal savings practices of a large portion of society are also in
serious jeopardy. The Commerce Department’s latest national income and product
accounts data shows that Americans are saving less than at almost any time since
the department began collecting the data in 1929. Its recently-adjusted figures
report that Americans saved only 2.1 percent of their disposable income in 1997;
in June 1998 the figure hit a staggering 0.2 percent annualized rate.
Twenty-five years ago, in 1973 and 1974, the savings rate reached a postwar high
of 9.5 percent, and it hovered at about 7 to 8.5 percent well into the 1980’s.
According to a study done last year by the non-profit research organization
Public Agenda and underwritten by Fidelity Investments, 46 percent of Americans
said they have saved less than $10,000 for retirement, including money saved in
their retirement plans.
Consumers account for 62% of the Gross National Product in the United States
today. According to Juliet Schor in her book “The Overspent American”, the
majority of Americans are intent on “Competitive Consumerism”. They try to
acquire the trappings of the rich by acquiring the most and latest toys. Schor
flogs the American way of life for its excesses, its materialism and its
dangerously pervasive messages that “you are what you own”.
Americans want to keep up with the Joneses, but cannot – too many of the
Joneses have become millionaires. The diabolical marketing by corporations of
the capitalist conspiracy keeps American consumers buying beyond their income.
Life has become a see -- want -- borrow -- and buy bummer. Americans spend more
than they realize, hold more debt than they admit, and ignore many of the moral
conflicts surrounding acquisitions. It seems a paradox: despite a booming
economy reflecting eight years of substantial growth, more than a million
Americans file for bankruptcy each year. Consumer bankruptcy filings shot up 29%
from 1995 to 1996. Last year, in 1997, they jumped another 20% to a record high
of 1.4 million. In 1985 only 350 thousand individuals filed for bankruptcy.
The flood of credit card offers in mailboxes has helped propel consumer debt
to record levels. Some experts say the spike in bankruptcies has come from ease
of filing for bankruptcy and the loss of the stigma that bankruptcy once
brought. One could easily observe that we have created a system to consume and
accrue debt when, in reality, we should be asking the question “what are
society’s goals” with respect to savings and debt and offering an approach as to
how to address them.
Recently, in Philadelphia, a couple earning a combined income of $75,000, who
were sending their children to private school at a combined cost of $7,500 a
year and renting a Mercedes, filed for bankruptcy. The bankruptcy judge found
that the couple did not abuse the law, commenting that “The debtors are persons
who became accustomed to living with the amenities of the upper middle class and
have been unable to completely adjust themselves to a somewhat altered financial
depression.”
Congress is currently grappling with this vexing problem. The result may be
the tightening of the bankruptcy code denying individuals the benefits now
enjoyed. The result could have a profound effect on the quality of life.
History is a great teacher -- often repeating itself – for many reasons. Why,
might we ask? People have not changed much over the course of modern
civilization. History sets precedents and gives people ideas. In this age of
extremes and the new world order, the ability to meet the needs of a modern,
rapidly changing globalized economy rests more and more on the shoulders of the
individual. This means that for consumers the future is in their hands.
We have had the luxury of living in an era, especially, over the last fifteen
years of one of the most scintillating periods in U.S. economic history. The
complexity and speed with which innovation has revolutionized the world of
finance have reached a proportion where it is difficult to comprehend all of the
dynamics of this fast-paced change from moment to moment. In the American
economic “miracle” everything should be up has gone up – GDP, capital spending,
incomes, the stock market, employment, exports, consumer and business
confidence. Everything that should be down is down – unemployment, inflation,
interest rates. This litany of America’s economic success may sound tinny to
those who feel their lives are buffeted by forces over which they have virtually
no control. People are working harder than ever before. The gap between the well
to do and the poor has been growing. The options for unskilled workers keep
shrinking, as does the “safety net” that is supposed to protect them if they
fall out of the economy altogether. The natural American tendency to feed a
national optimism and sense of renewal that rides over the potholes of politics
and defies predictions of calamity must be held in check.
When the Clinton Administration introduced the notion of health care reform
early in the first term our national conscience was awakened to the fact that
over 35 million working Americans were without health care coverage and that
number has increased to 43 million in 1998. Today, with prescription drug costs
skyrocketing, it is shocking that 145 million Americans are not covered by a
prescription drug plan. As we face the most profound demographic change in the
history of our nation – the “age wave” – many American consumers are
ill-prepared for retirement.
E. Lack of Retirement Planning by
Workers
We are in what Arthur Levitt, Chairman of the Securities and Exchange
Commission, recently characterized as a “financial literacy crisis”. One out of
two Americans has no pension coverage. Three out of four Americans do not know
how much they will need to retire. Three out of four Americans do not know the
difference between a stock and a bond. One out of three workers who is offered a
401(k) plan does not participate. One out of five has saved nothing for
retirement. A recent poll showed that people fell into these various categories:
21% are planners
15% are impulsive
19% are deniers (believing they won’t live long enough)
26% are strugglers (and need help)
With people living longer lives, the period of retirement will be almost as
long as the period of working. Institutions shunting more responsibility onto
the shoulders of the individual mandates the necessity for individual knowledge
and individual action. The individual cannot go it alone. With mergers and
acquisitions, downsizings, restructuring and re-engineering, the world of
workers is riddled with tragedy and high anxiety.
F. Shift to Defined Contribution Plans
Much has happened to change the private pension plan system as well as the
methodology for delivering benefits. Since the 1970’s, qualified defined
contribution plans, participants, and contributions have grown as a percentage
of the employment based retirement system. According to the findings from the
Form 5500 series report filed with the Department of Labor for 1994 the count of
private pension plans filing was about 690, 350, a 2% decrease from 1993. The
number of defined benefit plans decreased by 11% to 74,400, while the number of
defined contribution plans has decreased by less than .5% to 615,900. The number
of defined benefit plans has decreased each year since 1986. The 1994 count is
only 43% of the peak total of 175,000 plans in 1983.
The long-term patterns of decreases in the defined benefit plan active
participants and increases in defined contribution plan active participants
continued in 1994. Defined benefit plan active participants decreased by 2% to
24.6 million. Defined contribution plan active participants increased by 2% to
40.4 million.
We have witnessed during the last two decades some serious trends that could
best be characterized as the “deinstitutionalization” of retirement benefit
coverage as evidenced by the statistics recited above. Many employers have
shifted the responsibility for providing for retirement income from their
shoulders to the shoulders of the worker as witnessed by the precipitous decline
of defined benefit plans and the increasing proliferation of defined
contribution plans where tomorrow’s retirees’ income security will likely depend
increasingly on his or her life-long money management skills and decisions.
What would normally have been considered an issue that most people would
readily rally around and support, namely, the creation of a pension plan for
employees, has become a debate about who is responsible for the employee’s
long-term retirement income goals. Perhaps the shift of pension coverage or,
more importantly, the lack thereof, has become more noticeable and profound for
employees of small employers.
G. Obstacles For Small Employers
A major portion of small employers do not offer retirement benefit programs
to their employees because of various obstacles including the tax laws,
regulatory issues, administrative costs, fear and a misperception as to what
employees want in a compensation package. As a result, it was determined to
undertake a much-needed examination of the issues that confront small businesses
and their employees in the area of pension programs and retirement planning.
Who cares? Over two-thirds of small business employees are not covered by a
retirement plan largely because companies’ revenues are uncertain or employees
prefer high wages or other benefits. Therein lies the charge to this Working
Group as to how to enhance and encourage the establishment of pension plans
offered by the small employer community.
Retiring workers with a pension plan will be able to supplement their Social
Security benefits with their retirement income. Those workers with low incomes
who do not have the ability to save and are not covered by a pension plan will
be at risk at an extremely vulnerable period of their lives. The burden of this
responsibility cannot be placed with the children of those retiring baby boomers
who themselves are facing dramatic changes in the world of work as we move
through this modern industrial transition known as the “new world global
economic order” into the 21st century. This new era is not a forgiving one. It
is dominated by instant communications; the accelerated flow of capital, and
global interdependence and interconnectedness as evidenced by the economic shock
waves occurring in other countries that rocked the American financial markets
during the summer of 1998.
H. Impact of Globalization
With the onset of accelerating and widespread globalization over the past two
decades, global competition among many American employers has skyrocketed.
Global capitalism is being unleashed with an intensity and scale we have not
witnessed before in economic history, in a world where national governments are
wrestling with the reality that they are becoming progressively less able to
protect businesses, investors, and individuals from the evolving and sometimes
brutal free market forces. When you assimilate and crunch this down to the
ground where most of us function, these changes will drive household decisions
on jobs, savings, buying houses, education, and the ability to provide a
comfortable and financially secure retirement. This intensity will continue.
Many organizations will increasingly deal with uncertain profit margins.
Certainly the flexibility to quickly divest a business venture or to terminate a
business with the least obligation can be a competitive advantage for an
organization competing globally. Defined contribution plans were perceived by
some businesses to be more preferable to defined benefits plans when they were
unsure of their organizations’ stability, viability, and profits. During periods
of stock market turmoil small business’ financing strategy can stall and for
some their financing efforts can go into a tailspin. Small firms have fewer
resources and financing alternatives when the wealth of people who provide the
seed money is in jeopardy.
I. Difference in Coverage Between Large and Small
Employers
The private voluntary retirement system has been relatively successful for
individuals employed by large companies. We have been less successful in
promoting and providing coverage among employees of small companies. In the
small employer community there are an array of reasons why pension plans are not
offered to their employees. In a world were the predominant concern is “will
today’s workers be able to maintain their pre-retirement standard of living”
and, it appears that most of the retirement debate centers on whether to
privatize Social Security or at least invest some of its funds in the stock
market, the Working Group has struggled and wrestled with the challenge as to
how to promote the recognition of the need to create retirement programs for a
large segment of the working population, some 32 million as estimated by the
Department of Labor, that are without coverage.
J. Summit on Retirement Savings
In 1997 Congress passed and the President signed into law the Savings Are
Vital to Everyone’s Retirement Act (SAVER). The Act called for an initial Summit
on Retirement Savings to be held on June 4th and 5th of 1998. The mission of the
Summit was to determine how best to raise awareness of the need for pension and
individual savings so that working Americans and their families may enjoy a
comfortable and secure retirement. This is an issue that must capture the
attention of government, employers, employees, the media, community
organizations, schools and families to work towards communicating the need to
build retirement security and in a more pervasive way, a national retirement
policy.
Delegates to the Summit represented the leadership from political parties,
large corporations, small businesses, labor organizations, and numerous trade
groups dealing with employee benefits, personal finance and retirement issues.
Of large concern were the barriers that Americans face when saving for
retirement and the challenges and obstacles employers’ face when providing
retirement plans. Clearly, the mantra for retirement security is the need to
educate all to its importance.
This fact was reinforced by three surveys that were released around the time
of the Summit. The surveys showed that Americans are worried about saving enough
for retirement. They also feel that they need more education to properly plan
for it and believe they will keep working part-time after they retire in order
to make ends meet.
Just one in four respondents to the 1998 Retirement Confidence Survey of the
Employee Benefit Research Institute (EBRI) said they believe they would have
enough money to live on after they retire. The survey polled 1,500 individuals
aged 25 and older. Their average age was 43. The survey found confidence hadn’t
budged in six years, despite a booming stock market and sharp rise in mutual
fund retirement investing.
K. How To Motivate Americans To Save
What can motivate American workers to save for their retirement? The study
found fear that was a factor for nearly half of those respondents who were
saving. Some 48% said watching retirees struggle motivated them. Some 37% cited
“time running out” as a motivator.
A second study by the same group, EBRI, showed employees of small businesses
need help from their employers to both motivate and educate them on the value of
retirement planning. A telephone survey of 601 small companies, those with 100
or fewer employees, found only about a third of workers were covered by
retirement plans. Few workers at these companies even inquired about retirement
planning, according to the survey. When there were plans, the most popular was
the 401(k) plan.
In those companies with plans, only about half offered retirement education
to workers and consequently, the study concluded, only about one employee in
five participated. In large companies, eight out of ten employees participated,
due largely to educational efforts.
Still another survey conducted and released by the American Association of
Retired Persons found baby boomers willing to work well into their retirement
years. Eight out of ten polled said they wanted to work at least part-time jobs
after they retire, mostly to maintain what they admitted was an indulgent
lifestyle. But a fourth said they believed they would have to work from
necessity. Today, just 12% of those over 65 now are working.
In March 1998 the Securities and Exchange Commission initiated a campaign
that aimed to motivate individuals to learn how to save and invest wisely. The
“Facts on Saving and Investing Campaign” is a response to the need for
heightened money management and investment skills among Americans. Financial
knowledge, skill and awareness are particularly important given the increased
individual responsibility Americans face for funding their retirements.
As recited above, Americans need to save more and invest wisely because they
can expect to live longer and many do not expect Social Security and Medicare to
provide benefits comparable to those that beneficiaries receive today.
L. Contingent Workforce And Small Employers Plan
Sponsorship
The globalization of the economy has forced companies to restructure,
re-engineer, merge with and acquire other businesses in order to heighten their
competitiveness. The growing cost of running a business, especially a smaller
one, has increased the practice of leasing or hiring contingent employees. For
those small employers that do not lease employees workers’ compensation rates
have gone through the roof. Despite an increasingly tight labor market, fewer
small businesses are offering health care and retirement benefits. This would
seem to defy conventional wisdom that employers are being forced to offer better
perks to attract employees as the unemployment rate has dropped to levels not
seen since the 1960’s.
Small employers are hiring independent contractors, temps, part-time and
younger, less- experienced people who may believe that they have less need for
pension benefits but instead seek higher salaries.
For those small employers who might give thought to providing retirement
benefits they are confronted by the apparent complexities associated with
creating pension plans. Part of the confusion may also be attributed to the
number of plans or options in existence.
The Department of Labor, through various offices, has done a great deal in
its outreach effort to promote the awareness for the need to create retirement
vehicles for employees of small employers. This group became a target group in
1995 when the department recognized that it had to be a catalyst to promote a
national campaign to educate Americans on the need to save for retirement. Other
groups targeted were women and minorities.
Brochures have been created and disseminated through organizations, at public
appearances of the Secretary and Assistant Secretary and through partnerships
developed with private sector groups such as the National Association of Women
Business Owners.
Work groups and task forces have been developed as well as coalitions with
business and community-based organizations like the Chamber of Commerce, the
Small Business Council of America, the Small Business Association, the Hispanic
Radio Network and African-American publications. An interactive web site (///)
has been established and the department maintains an 800 number (800-998-7542)
where inquiries can be made and information can be obtained.
Small employers who have a plan find that their ability to hire and retain
good employees is enhanced. Also, a pension plan can have an impact on employee
attitude and performance and certainly facilitate an employee’s ability to
prepare more substantively for retirement.
Those small employers who do not have a pension plan who were surveyed
recited three main reasons why (1) they see their employees’ preferences for
wages and other benefits; (2) the cost of set up and administration as well as
government regulations; and (3) their uncertain revenue stream makes it
difficult to commit to a plan.
When asked what changes would lead to serious consideration to establish a
plan the following responses were given: (1) an increase in profits; (2)
providing a business tax credit for starting a plan; (3) an increase in demand
from their employees; and (4) allowing key executives to save more in a plan
(i.e., eliminate the non-discrimination requirements).
The notion of employers having the ability to pool resources and participate
in a coalition or multiemployer-like vehicle might enhance the willingness to
establish plans. Multiemployer plans as a retirement delivery system offer: (1)
economies of scale; (2) no regulatory compliance obligations; (3) the
requirement to pay the contribution; (4) a pooling of actuarial costs; (5)
security from investment risk and volatile fund fluctuations; (6) access to
professionals - attorneys, accountants, actuaries, investment managers and
investment consultants; and, (7) portability for employees.
The Employee Retirement Income Security Act of
1974 (ERISA) is a federal law that sets minimum standards for pension plans in
private industry. For example, if your employer maintains a pension plan, ERISA
specifies when you must be allowed to become a participant, how long you have to
work before you have a nonforfeitable interest in your pension, how long you can
be away from your job before it might affect your benefits, and whether your
spouse has a right to part of your pension in the event of your death. Most of
the provisions of ERISA are effective for plan years beginning or after January
1, 1975.
ERISA does not require any employer to
establish a pension plan. It only requires that those who establish plans must
meet certain minimum standards. The law generally does not specify how much
money a participant must be paid as a benefit.
ERISA does the following:
- Requires plans to provide participants with
information about the plan including important information about plan
features and funding. The plan must furnish some information regularly and
automatically. Some is available free of charge; some is not.
- Sets minimum standards for participation,
vesting, benefit accrual and funding. The law defines how long a person may
be required to work before becoming eligible to participate in a plan, to
accumulate benefits, and to have a nonforfeitable right to those benefits.
The law also establishes detailed funding rules that require plan sponsors
to provide adequate funding for your plan.
- Requires accountability of plan fiduciaries.
ERISA generally defines a fiduciary as anyone who exercises discretionary
authority or control over a plan's management or assets, including anyone
who provides investment advice to the plan. Fiduciaries who do not follow
the principles of conduct may be held responsible for restoring losses to
the plan.
- Gives participants the right to sue for
benefits and breaches of fiduciary duty.
- Guarantees payment of certain benefits if a
defined benefit plan is terminated, through a federally chartered
corporation, known as the Pension Benefit Guaranty Corporation.
ERISA also creates standards welfare benefit
plans, but those plans are not discussed in this booklet.
Generally speaking, there are two types of
pension plans: defined benefit plans and defined contribution plans. A defined
benefit plan promises you a specified monthly benefit at retirement. The plan
may state this promised benefit as an exact dollar amount, such as $100 per
month at retirement. Or, more commonly, it may calculate a benefit through a
plan formula that considers such factors as salary and service -- for example, 1
percent of your average salary for the last 5 years of employment for every year
of service with your employer.
A defined contribution plan, on the other hand,
does not promise you a specific amount of benefits at retirement. In these
plans, you or your employer (or both) contribute to your individual account
under the plan, sometimes at a set rate, such as 5 percent of your earnings
annually. These contributions generally are invested on your behalf. You will
ultimately receive the balance in your account, which is based on contributions
plus or minus investment gains or losses. The value of your account will
fluctuate due to the changes in the value of your investments. Examples of
defined contribution plans include 401(k) plans, 403(b) plans, employee stock
ownership plans, and profit-sharing plans. The general rules of ERISA apply to
each of these types of plans, bust some special rules also apply. To determine
what type of plan your employer provides, check with your plan administrator or
reach your summary plan description (see p.13).
A money purchase pension plan is a plan that
requires fixed annual contributions from your employer to your individual
account. Because a money purchase pension plan requires these regular
contributions, the plan is subject to certain funding and other rules.
Your employer may sponsor a simplified employee
pension plan or SEP. SEPs are relatively uncomplicated retirement savings
vehicles. A SEP allows employees to make contributions on a tax-favored basis to
individual retirement accounts (IRAs) owned by the employees. SEPs are subject
to minimal reporting and disclosure requirements.
Under a SEP, you as the employee must set up an
IRA to accept your employer s contributions. As a general rule, your employer
can contribute up to 15 percent of your pay into a SEP each year, up to a
maximum of $30,000.
If you work for a company employing 25 or fewer
people, your employer may establish a salary reduction SEP. If your employer has
such a plan, in addition to any employer contributions to your SEP, you may also
elect to have SEP contributions made on your behalf from your salary on a
before-tax basis, up to the lesser of 15 percent of your pay or $9,240 in 1995.
Your deferral contributions are added to any employer contributions to determine
the annual limit ($30,000 or 15% of your pay). Other limits may apply to the
amount that may be contributed on your behalf. State and local governments and
tax-exempt organizations are not eligible to establish salary reduction SEPs.
A profit sharing or stock bonus plan is a
defined contribution under which the plan may provide, or the employer may
determine, annually, how much will be contributed to the plan (out of profits or
otherwise). The plan contains a formula for allocating to each participant a
portion of each annual contribution. A profit sharing plan or stock bonus plan
include a 401(k) plan.
Your employer may establish a defined
contribution plan that is a cash or deferred arrangement, usually called a
401(k) plan. You can elect to defer receiving a portion of your salary which is
instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes
the employer may match your contributions. There are special rules governing the
operation of a 401(k) plan. For example, there is a dollar limit on the amount
you may elect to defer each year. The dollar limit on the amount you elect to
defer each year. The dollar limit in 1995 is $9,240. The amount may be adjusted
annually by the Treasury Department to reflect changes in the cost of living.
Other limits may apply to the amount that may be contributed on your behalf. For
example, if you are highly compensated, you may be limited depending on the
extent to which rank and file employees participate in the plan. Your employer
must advise you of any limits that may apply to you.
Although a 401(k) plan is a retirement plan,
you may be permitted access to funds in the plan before retirement. For example,
if you are an active employee, your plan may allow you to borrow from the plan.
Also, your plan may permit you to make a withdrawal on account of hardship,
generally from your funds you contributed. The sponsor may want to encourage
participation in the plan, but it cannot make your elective deferrals a
condition for the receipt of other benefits, except for matching contributions.
The adoption of 401(k) plans by a state or
local government or a tax-exempt organization is limited by law.
Employee stock ownership plans (ESOPs) are a
form of defined contribution plan in which the investments are primarily in
employer stock. Congress authorized the creation of ESOPs as one method of
encouraging employee participation in corporate ownership.
The Department of Labor enforces Title I of
ERISA, which, in part, establishes participants rights and fiduciaries' duties.
However, certain plans are not covered by the protections of Title I. They are:
- Federal, state, or local government employee
plans, including plans of certain international organizations.
- Certain church or church association plans.
- Plans maintained solely to comply with state
workers compensation, unemployment compensation or disability insurance
laws.
- Plans maintained outside the United States
primarily for non-resident aliens.
- Unfunded excess benefit plans -- plans
maintained solely to provide benefits or contributions in excess of those
allowable for tax-qualified plans.
The Labor Department's Pension and Welfare
Benefits Administration is the agency charged with enforcing the rules governing
the conduct of plan managers, investment of plan money, reporting and disclosure
of plan information, enforcement of the fiduciary provisions of the law, and
workers benefit rights. But other agencies also are involved in pension law
monitoring and enforcement. They are:
- The Treasury Department's Internal Revenue
Service is responsible for ensuring compliance with the Internal Revenue
Code, which establishes the rules for operating a "tax-qualified"
pension plan, including pension plan funding and vesting requirements. A
pension plan that is "tax-qualified" can offer special tax
benefits both to the employer sponsoring the plan to the participants who
receive pension benefits. The IRS maintains a taxpayer assistance line for
employee plans at (202) 622-6074 (1:30-4:00 p.m. Eastern Time, Monday-
Thursday).
- The Pension Benefit Guaranty Corporation.
The PBGC, a non-profit, federally created corporation, guarantees payment of
certain pension benefits under defined benefit plans that are terminated
with insufficient money to pay benefits. The PBGC may be contacted at 1200 K
Street, N.W., Washington, D.C. 20005, telephone (202) 326-4000.
|