Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 17, 1991 TAG: 9103180231
SECTION: BUSINESS PAGE: E-1 EDITION: METRO
SOURCE: BY ALBERT B. CRENSHAW/ THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Long
The rules would put strong pressure on employers who operate tax-deferred savings plans, such as 401(k) plans, to increase the number of investment alternatives they provide employees. They would also press companies that offer their own stock in such plans to give the employees clear voting control of the shares in the employees' accounts.
The rules were completed by the department late last year but had been awaiting clearance by the Office of Management and Budget.
The philosophy underpinning the proposed regulations is what the administration likes to call "economic empowerment."
"Its policies," said David George Ball, assistant labor secretary, "are designed to create a framework within which individuals are free to do the best they can do for themselves."
As applied to employee-savings plans, this means giving the workers "maximum control over their own investments," Ball said.
The rules, which Ball said he hopes will be in final form by this summer and in effect 180 days after that, do not actually require employers to do the things the administration wants. But failure to comply will expose the employer to a potential liability as plan fiduciary - the possibility that if an employee were unhappy over the plan's performance, he or she could sue.
Most employers are expected to comply.
To meet the test under the regulations, a plan would have to allow participants to:
Choose from a broad range of investment alternatives. Ball said in his speech to the Employee Retirement Income Security Act Industry Committee that this means employees be offered "at least three diversified groups of investments" that have different risks and returns. For example, an employer might offer a stock mutual fund, a bond fund and a money market fund.
"Have a reasonable opportunity to give investment instruction," which means the right to move money into or out of the three basic investment choices at least once every three months.
Diversify investments, both generally and within investment categories.
In addition, firms that offer their own stock to employers could do so only as a fourth option. Company stock could not be one of the basic choices and could be included only if it were publicly traded and fairly liquid.
The rules will certainly increase investment options, and these choices will help careful investors make the most of their opportunities.
But in doing so they may further grease the skids under the traditional pension plan. In these plans, employers put money aside in an investment fund and pay a pension benefit that is defined by a formula. This formula usually involves the number of years the pensioner worked at the company and what his or her pay was in the years shortly before retirement.
In these plans, the investment risk - the chance that the investment fund will not grow enough to pay the benefits - is borne by the employer and ultimately by the government through an insurance program if the employer goes broke.
These plans, which involve immense sums of money, are professionally managed and employ the most sophisticated investment strategies. In fact, during the 1980s, many were so successful that they became overfunded, and some even attracted corporate raiders intent on tapping the excess.
The savings plans covered by the new regulations are defined-contribution plans. The employer and/or the employee put in a set amount and the employee gets that, plus or minus investment earnings at retirement.
The disadvantage of defined-benefit plans is that formulas work against people who change jobs. Defined-contribution plans do not suffer in job changes, unless workers take the money out and spend it, which an alarming number do.
The Labor Department has been working on the issue of pension "portability." Ball suggested that it has thrown up its hands on the issue as far as defined benefit plans go and is concentrating on defined contribution plans.
Ball said the department's policy reflects "a basic philosophy, the philosophy of freedom."
But because the risk falls entirely on the worker, he conceded that "it's kind of a severe doctrine. It's rough, because you're not protecting people against themselves. They have the responsibility."
But the department's own figures suggest that people do need such protection.
Workers who get lump-sum distributions from their defined contribution plans spend as much as 80 percent of the money. This suggests that excessive reliance on these plans may create a lot of needy people in a few decades.
"Historically, that always has been the argument in favor of defined benefit plans to protect people against themselves," Ball said. But the administration is intent on moving away from that approach. He also said that employees like the fact that they can see their account balances and know where they stand with defined-contribution plans.
However, just because the Labor Department believes defined-contribution plans are the wave of the future doesn't mean workers should rush to embrace them, at least not if it means giving up a good defined-benefit plan. These traditional pensions have helped make the current generation of retirees among the best-off in U.S. history, and if you plan to stay at one job for most of your working life, you could benefit similarly.
And if you have to take a defined contribution plan - or are offered one in addition to a defined benefit plan - take maximum advantage of it. Put in as much as you can, and if you change jobs, don't let that lump-sum payment "burn a hole in you pocket," as Ball put it. Roll it over into your new employer's plan if that's allowed, and if not, put it into an individual retirement account.
by CNB