Business of Benefits
DC Plans and the Recession Inequities
Many in the industry saw early on, and tried to address, the terrible disruption caused by the change in 403(b) regulations during the recession. In many circumstances, the transition to the new rules made amounts in many 403(b) contracts unavailable at a time when many teachers and employees of not-for-profit organizations (who were among the hardest hit by the collapse) needed them the most-as loans, hardship distributions, or terminating distributions during times of often grievous financial circumstances.
401(k) plans did not suffer that fate, and I really believe that this recession would have been many times worse had it not been for those defined contribution balances (including 403(b) plans) which acted as a reserve for those who lost their jobs. I have not yet seen anyone research on those numbers, but the anecdotal evidence appears strong.
Much of the literature being published today talks of how the recession, and the related capital losses within DC account balances, speak strongly of the need to preserve that accumulation from future shocks by using those balances to purchase guaranteed income products. I cannot disagree more strongly. Many of you know from my writings that I am a strong supporter of guaranteed lifetime income but, I think instead, that the recession demonstrated the huge value of the DC account balance plan: it provided an invaluable cushion to many at a time they needed it most, which would have been otherwise unavailable in a DB type of arrangement. These plans had not been so widely available during economic shocks in the past.
But there are, and continue to be, huge inequities related to government policies related to the handling of DC plans throughout the recession.
At a time when it was necessary to provide substantial assistance to large financial institutions in many-and now we found out, often hidden-ways (yes, I am a devotee of Gretchen Morgenson and her weekly column in the New York Times), those who were unemployed continued to pay a 10% penalty tax on their defaulted loans and DC distributions which were taken to keep them afloat. The operation of the 10% was, and is, especially cruel, as it is paid regardless of the application of the marginal rate or deductions. So, even if income was so little as to pay little or no tax, the 10% penalty still applied.
The practical effect is that the unemployed were funding, even if in the smallest part, the assistance to large financial orgs which received substantial government support (and, apparently, paid large bonuses from those funds to many of their still employed executives and traders). Regardless of political persuasion, most should have difficulty with this proposition.
Now, as the economy recovers, and hopefully employment returns, many in Congress speak of reducing the amount that can be put into DC plans. Any reduction will have at least two unintended effects which are little mentioned: it will substantially reduce the ability of re-employed participants to rebuild those depleted balance which helped sustain during the recession; and it will seriously impair the ability of all to build that so-important-cushion for future financially crises. I would make the case that the smartest thing Congress could do right now is to increase the DC limit, as least for an interim period, to allow balances to be rebuilt.
We do not hear about this much, as it is being suffered by those without a voice: the unemployed and underemployed; those who are being treated so cruelly by the system in which they had, at one time, been invested. But it is all very real, nonetheless.