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RAY SUAREZ: And for more we turn to James Delaplane, vice president for retirement policy at the American Benefits Council, which represents employer interests in Washington; Mark Machiz, former Associated Solicitor at the Labor Department in the Clinton administration, he’s now a partner with a Washington law firm; and Steven Sass, a research associate at the Center for Retirement Research at Boston College.
James Delaplane, what did you find significant about the president’s proposals today, and what was your overall impression?
JAMES DELAPLANE: I think we were very gratified that the president rejected a number of the most aggressive proposals that have been put forward in Congress.
For example, capping at a fixed percentage; the amount of company stock any single worker could have in their account.
And then beyond that, a number of proposals that I think we can support with respect to giving workers additional information, greater notice about their 401(k) plans, trying to see that employers provide advice to the 401(k) investors.
There are a couple of areas that he laid out today that we have some concerns about and some questions about – this issue of greater diversification rights for workers and potentially greater liability for employers.
We think there are some careful issues that need to be analyzed there. We don’t want to see any reduced matching contributions by employers as a result of some of these diversification changes, and we’d hate to see new liabilities frustrate the continued expansion of the 401(k) system.
There are many American workers that still do not have a retirement plan, and we’d hate to see additional burdens and regulations prevent new employers from starting those plans up.
RAY SUAREZ: Mark Machiz, what would you want us to look at in the president’s proposals today, and what are your overall impressions of the plan?
MARK MACHIZ: Well, my overall impression was to be profoundly disappointed with what the president has proposed because the proposal here really doesn’t address anything that went wrong in the case of Enron.
Basically what happened at Enron is the employees got wiped out because they were massively invested in Enron’s stock and they were massively invested in Enron’s stock primarily as a result of their own choice, not because they were – not because they were locked in and not because they didn’t have power with the executives in terms of their ability to move out of the stock.
The proposal that’s been given to us today does absolutely nothing to protect workers from finding themselves in exactly the situation that the workers at Enron were in, which is to be massively over committed to a single stock and subject to all of the – all of the terrible things that happened, regardless of whether a company goes under because of fraud or because of simple financial reverses.
RAY SUAREZ: Regardless of whether this would have addressed the Enron situation, are these improvements in 401(k) plans?
MARK MACHIZ: I would say they are improvements of such a marginal fashion that they serve more to cover up the very real problems that exist than they do to solve anything.
I don’t think the problem is that people can’t get out of their employer match.
I think the problem is that people faced with the opportunity to invest in only a single stock, and that which is their employer’s stock, and otherwise are given safe and responsible alternatives too often choose to swing for the fences, to try and beat the odds and leave themselves open to being sorely disappointed.
We haven’t addressed that problem here today. We will not prevent another Enron. There will be another Enron in short order if the president’s proposal is all that’s enacted.
RAY SUAREZ: Steven Sass, is there a history in this country about responding to political or fiscal crisis in the system with pledges or proposals for reform?
STEVEN SASS: Yes. Probably the Studebaker example is the one that’s most prominent in the history of pension plans.
In some ways, it was very similar that you had workers who really had all their assets taken out of a pension plan prior to retirement, and they were left with very little. This event caused a series of discussions and debates, which ultimately led to ERISA, which is the basic law governing pension plans today.
Prior to that in the 1920s, there was a private company called Morris Packing that went bust that had a similar effect and that actually that led to a private reform of pension plans at that time.
My take on the Enron case is really much closer to Mr. Machiz’s view, that I think that we really should look at the entire 401(k) institution at this time from a much broader perspective. I think most people would think that it is a great success, it has done wonderful things, it’s a good solid institution.
I think the other point that Mr. Delaplane made that we have to be careful about making it comfortable for employers to start these plans is another important point that has to be included.
But the larger issue about how much risk we should have in these plans is one that really does need to be addressed. These are plans that are– that use a lot of government subsidy in terms of the tax benefit they get and how much risk we have in these huge plans, which, as was mentioned, was $2 trillion, are in these plans.
They’re a fundamental part of our retirement income security. And whether it’s company stock or even a high-risk growth fund, that might be okay, but we have to really think about whether these plans are suited for retirement income security. And there’s just one other issue, which I think has to be thrown in when we look at these plans. It’s the whole issue of annuitization.
The people at Enron have two problems. One is that they have a very small amount of money. The second, if they wanted an annuity or live off the interest today, the interest rates currently are quite low.
So the ultimate goal of a 401(k) is not to amass a large amount of money but it’s to provide retirement income over twenty or more years of your life. We really should take a broader view as to whether this institution is properly designed to meet those public objections.
RAY SUAREZ: Let me go back to Mr. Delaplane because at the outset you said you were glad that there weren’t more restrictions put in. Steven Sass points out that the government has oversight in return for the fact that this money is gained by the employee tax free.
JAMES DELAPLANE: Sure. And clearly the 401(k) system already has substantial regulation. You raised the question of our pension laws have often responded to a particular situation: Studebaker in the past, Enron today.
I think there is a danger from that. Enron is a single situation, clearly an aberration. The 401(k) system generally is very successful and unfortunately the past history in reaction to Studebaker, we layered on so much regulation of traditional pensions that those pensions have dramatically declined since 1974 when the original pension statute was passed.
RAY SUAREZ: And by pensions you mean employer funded -
JAMES DELAPLANE: Employer provided traditional defined benefit pensions; those have declined for more than 175,000 in the mid-’80s to less than 50,000 today.
We’re just fearful that if we’re not cautious and deliberate about the changes today, we might over regulate 401(k)s in the same way. And that could be very damaging. And I think I take a little issue with Mr. Machiz’s point. I think there are some very concrete things the president said today that will help workers manage that risk, exercise that responsibility, that we’ve heard discussed.
There will be new disclosure tools that will talk about the importance of diversification. There will be the removal of some barriers that have prevented employers from getting professional advice to 401(k) investors.
We heard a panel of witnesses in Congress several weeks back from Enron. The one gentleman who did not really suffer significant losses was someone who had retired about a year ago and went to see a financial planner. And that person said to him, you’re too concentrated in Enron stock; we need to diversify your portfolio into a number of other options. And he suffered a very modest loss this year as opposed to the retirees highly concentrated.
So getting professional advice to individual 401(k) investors really is part of the strategy to prevent future Enrons.
RAY SUAREZ: Mark Machiz.
MARK MACHIZ: I think it’s important that we realize that the investment advice bill that the president is talking about is another example of solving a problem that doesn’t really exist.
Right now everybody has access to investment advice, and employers are free to provide investment advice to their employees. What the bill under consideration does is simply make it clearer that even though the particular investment adviser that the employer is offering the employee himself suffers from essentially severe conflicts of interest, but that isn’t going to put the employer at risk.
RAY SUAREZ: What about Mr. Delaplane’s point about making this voluntary, not putting in restrictions because of what we’ve seen in the past, a disincentive for employers to well endow pension?
MARK MACHIZ: Certainly there’s important reasons to encourage employers to endow pensions. And I for one would never suggest employers shouldn’t be permitted to and indeed encouraged to contribute employer stock to these plans. That can be done in the framework of a system that protects people from being over diversified.
The point that Mr. Delaplane made that Enron is an aberration I have to take very, very serious issue with. What is not at all an aberration about Enron is the degree of commitment that the employees in that company made to their employer stock.
Many large brand name United States companies have similar high concentrations of employer stock in their 401(k) plans. Are they all going to fail like Enron? Certainly I hope not and certainly I don’t expect them to.
Can we pretty much predict that if we wait around for another couple of years we’ll see another Enron just as we’ve seen other companies in the past like the Color Tile company a couple years ago go under and take the employees pension savings with them, we can be certain that if we leave the system the way it is, if we only enact the reforms we heard from President Bush, that we are going to see that in short order.
RAY SUAREZ: Steven Sass, go ahead.
STEVEN SASS: About the financial advice, I think actually that could be very beneficial. It’s something I think a lot of Americans need.
I think that there would be no reputable financial adviser that would recommend any significant amount of company stock in your 401(k). So whether the government mandates that it be excluded or you go to a financial adviser and he says you should get out of it as quickly as possible, good financial plan would go have you basically not be funding retirement plan with company stock.
RAY SUAREZ: But wouldn’t that eventually take away the incentive that employers have for giving you that benefit in stock? They’re certainly not going to give you the equivalent amount in cash, are they?
STEVEN SASS: Well, they can give you the stock and you can sell it. There could be some diminution of the incentive to — a financial incentive to company to give you a plan if they couldn’t give you stock.
I think the basic problem is that you have two conflicting objectives here. One is retirement income security. And the other is an employer trying to develop a closer bond with the employee, which is something that is legitimate and it’s beneficial. Actually, a lot of government law promotes profit sharing, stock bonus plans, because the government thinks this is a good thing.
I think though that in the case of 401(k)s, that they become such a large institution, such a fundamental issue in the support of retirement income, that those interests ought to trump the benefits of improving the relationship between employers and employees. And it should be that goal and good financial planning should rule the regulations of 401(k)’s more than the beneficial effects that an employer might get by giving this benefit in company stock.
RAY SUAREZ: Well, to be continued since it hasn’t turned into a bill or a debate yet but gentlemen, thank you all.