I was intending to leave this issue alone for a few weeks, and wait until the Workplace Pension proposal (upon which we blogged a few days ago) had a chance to percolate within the retirement industry. But I had the chance to spend a few minutes with David John (David is a senior scholar at the Heritage Foundation and is one of the Principals of the Retirement Security Project) in DC this week, and he spoke of this program-one on which he and Mark Iwry have spent years developing. The conversation set me to thinking.
Those of us who have spent serious time within a large organization, whether it be a financial services company, a manufacturing company or a governmental agency, all have many war stories on these organizations' capacity to ignore lessons from their own pasts-even their recent pasts. I would argue (digressing for a moment) that many of our current economic problems arise from us ignoring our history-not remembering that the anti-trust rules were there in part to prevent a handful of companies and individuals from amassing so much economic strength as to be able to wrack havoc on the entire economy.
So what does this have to do with the President's proposals for Workplace Pensions? The retirement markets have a long and rich experience in dealing with salary deferral programs which can well inform the structure of this new program. We know what things work, and what things have been a disaster.
This proposal is unique in that it DOES recognize our experience. It has the support of both ends of the political policy spectrum (scholars from both Brookings and Heritage have lent their weight), which is likely because it uses well learned lessons of our past.
Some thoughts of what this thing may look like:
- Yes, the proposal really does look a lot like the simple, old 403(b) programs. Though the legislative proposal is not yet written, the idea is designed to rely upon marketplace products. The twist is that vendors will be listed in a program designed on the successful parts of Medicare Part D. And simplicity is a key.
- It will recognize the need for safe, "stable value" like investments for a while, until the employee can weigh in on where the money will be invested.
- There will be "COBRA -like" rules for small employers, and there will "403(b) like" rules for part-time and short term employees.
Fee transparency will be important, and there is even some discussion of the making available the purchase of lifetime income guarantees.
There will be a number of technical issues that will come up as this thing progresses. Some may have been addressed, but they are worth noting:
- We need to avoid the 403(b) disaster, which has arisen from trying to force an individual pension program into an employer program mold.
- The tensions with Title 1 of ERISA will need to be addressed. A way needs to be found to balance employee protection (for example, on the deposit of the funds) with limits on employer responsibility.
- There are a number of technical security law rules which need to be addressed, as most of these products will be registered investment products. Touchy issues such as suitability, prospectus delivery, and whether, practically, an employer can force the purchase of a registered product.
- Data, we have learned over time, is ugly. Privacy of data is critical. So the lesser the data requirements, likely the better.
I expect that there is much discussion and negotiation yet to be had. Of course, there is likely to be a grand policy debate on whether this sort of program will ultimately lessen the use of traditional 401(k) and profit sharing plans, undermining incentives for employers to contribute to their employees' retirement.
But the thoughtfulness and bipartisan manner in which the proposal has been developed leads me to believe that these sorts of issues (and others) will be well addressed. It is a welcome breather from the often frantic approach to policy we have seen emerge in the past few years.
