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Retirement Savings Policy

Book Description

Mike brings to this work his comprehensive experience and consummate technical talent in a beautifully readable book. A treasure.

--Frank Cummings, Former Adjunct Lecturer in Law at UVA Law School, Columbia Law School, NYU Law School, and ALI-ABA

Retirement Savings Policy reviews the basic policies that govern retirement savings plans, and their real world application, focusing on the key issues of finance, taxation, fiduciary conduct, and employee choice. The discussion is framed around the three fundamental challenges confronting employers and employees today – the pension legacy, the 401(k) revolution, and the pressure, from policymakers, regulators, opinion leaders, and individuals, for changes that will put retirement security within reach of all Americans.

With more than 40 years’ experience in the field, Michael P. Barry provides both a wealth of practical detail – best practices and concrete solutions – and a broad framework for understanding the issues surrounding retirement plans and strategies. The result is a comprehensive introduction to the forces that drive sponsor, participant, and policymaker decision-making.

This is the perfect book for benefits and financial professionals who want a better understanding of the basic rules that govern retirement plan administration but also serves those interested in truly understanding the nuances and issues surrounding retirement plans and policies. The approach is practical, focusing on how US retirement plans actually work, how they are taxed (and not taxed), how they are regulated.

But it is also conceptual, devoting considerable attention to an understanding of why these plans work the way they do. Why regulators and policymakers are so focused on a handful of issues – expanding coverage, reducing fees, fairness. And, at the highest level, what are the problems that we are trying to solve. As such, much of what we discuss will be of interest to a more general reader, who wants a realistic understanding of what is really at stake in current retirement policy debates.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Acknowledgments
  5. About the Author
  6. About the Series Editor
  7. Contents
  8. Introduction
  9. Part I: The Defined Benefit Plan Legacy
    1. Chapter 1: An Overview of Existing Plans
    2. Chapter 2: DB Plan Basics
      1. A Formula Benefit
      2. Where All the Risk Is Borne by the Sponsor
      3. The Three Risks of Retirement Savings
    3. Chapter 3: The DB Valuation Challenge
      1. The Challenge
      2. The “Time Value of Money”
      3. Going Concern—The Portfolio Rate of Return Option
    4. Chapter 4: The Regulatory Framework—Benefit Insurance, Minimum Funding Rules and Accounting Standards Affecting DB Plan Finance
      1. The Pension Benefit Guaranty Corporation
      2. The Pension Protection Act of 2006
      3. Plan A: Tighten the Minimum Funding Rules
      4. Plan B: Relax Minimum Funding Standards and Increase PBGC Premiums
      5. The Current Minimum Funding Regime
      6. The Current PBGC Premium Regime
      7. The Accounting Regime, Very Briefly
      8. How DB Liabilities Are Valued for Financial Statement Purposes
    5. Chapter 5: The Regulatory Framework—Minimum Standards for Retirement Plan Design and Tax Code Nondiscrimination Rules
      1. Minimum Standards
      2. Spousal Rights—the Retirement Equity Act of 1984
      3. Tax Code Nondiscrimination Rules
      4. Tax Code Limits on Benefits, Contributions, and Compensation
    6. Chapter 6: Problems with the DB Design
      1. Issues with DB Design
      2. The Inadequacy of Pre-Retirement Income as an Index of Post-Retirement Needs
      3. The Inadequacy of a Flat Retirement Income Target
      4. The Significance of Post-Retirement Risk
      5. The Inadequacy of a Benefit Design Based on a Full Career
      6. The DB Benefit Is Significantly Backloaded
      7. Significance for Corporate Culture
    7. Chapter 7: The Cash Balance Plan Conversion Crisis
      1. What Is a Cash Balance Plan?
      2. Why a Cash Balance Plan?
      3. Why Did These Plans Have a Surplus?
      4. Why Does a Funding Surplus Matter?
      5. Why Cash Balance Plans Solved This Problem
      6. Cash Balance Plan Conversion = A Decrease in Benefits for Older Employees
      7. Massive Employee Pushback
    8. Chapter 8: The Secular Decline in Interest Rates and the Viability of DB Plans
      1. What About the Other Two Sponsor Risks—Investment and Mortality?
      2. A Fundamental Lack of Transparency
    9. Chapter 9: Getting Out, Slowly
      1. The Increased Cost of Plan Termination
      2. Getting Out Without Getting Out—The Plan Freeze
      3. Taming Liabilities—Liability Driven Investments
      4. The LDI Overlay
    10. Chapter 10: Managing the DB Legacy—Reducing PBGC Premiums
      1. Plan Funding, Briefly
      2. PBGC Premiums, At Length
      3. Pursuing a Contribution Policy That Reduces Variable-Rate Premiums
      4. Variable-Rate Premium Fundamentals
      5. Two Broad Strategies
      6. Strategies for Maximizing the Value of the Headcount Cap
      7. PBGC Premiums and Basic Retirement Policy
    11. Chapter 11: The Cash Balance Alternative
      1. The PPA Legitimizes the Cash Balance Design
      2. Market Cash Balance Plans
    12. Chapter 12: Intermezzo—Basic Policy Considerations Part I
      1. Two Kinds of Office
      2. What Are the Retirement Benefits?
      3. The Status of Subsidized Benefits
      4. A Legitimate Expectation That the Employer Would Continue the Plan
      5. DB Plans, a Verdict
      6. Who Pays for Retirement Benefits?
      7. Retirement Savings Tax Policy—Two Views
  10. Part II: Defined Contribution Plans and the 401(k) Revolution
    1. Chapter 13: The Rise of the 401(k)
    2. Chapter 14: DC/401(k) Plan Basics
      1. How Contributions Are Determined
      2. How Assets Are Invested
      3. How Benefits Are Paid
      4. A Retirement Savings Design that Functions Like Compensation
      5. What Happened to the Three Risks?
      6. The Structure and Administration of 401(k) Plans
    3. Chapter 15: The DC Adequacy Challenge
      1. What Is Adequacy?
      2. A Subjective Answer to the Adequacy Question
      3. Towards an “Adequate” Policy Framework
      4. Ambiguities
      5. Three Sorts of Answers to the Adequacy Question
      6. Adequacy of Investment
      7. Payout
    4. Chapter 16: Adequate Savings and the Regulatory Framework—Retirement Savings Tax Incentives
      1. The Current System
      2. Retirement Savings Tax Benefits
      3. How Much Are These Tax Benefits Worth?
      4. Methodology
      5. “Roth” versus Regular Contributions
      6. Retirement Savings Tax Incentives, Rothification, and the Budget
      7. A Middle-Class Tax Benefit?
      8. Does This System Work?
    5. Chapter 17: 401(k) Tax Code Nondiscrimination Rules
      1. The ADP Test
      2. The Dollar Limit on 401(k) Contributions
      3. Passing the ADP Test
      4. Participant Education
      5. Matching Contributions
      6. Safe Harbors
      7. Defaults
    6. Chapter 18: Adequate Investment—The Asset Allocation Challenge
      1. Participant Education
      2. Default Investments
      3. 2007 QDIA Rules
      4. DOL’s QDIA Regulation
      5. QDIA/Target Date Funds as the Preferred Asset Allocation
    7. Chapter 19: ERISA Fiduciary Rules
      1. Who Is a Fiduciary under ERISA?
      2. What Are a Fiduciary’s “Duties”?
      3. ERISA Section 404(c)
      4. Residual Obligations of Plan Fiduciaries Under 404(c)
      5. General Fiduciary Standards
      6. Prohibited Transactions
      7. Prohibited Transaction Exemptions
    8. Chapter 20: The Structure and Administration of 401(k) Plans, Revisited
      1. Basic Organization
      2. Fiduciary Selection and Monitoring of Plan Service Providers
      3. The Structure of 401(k) Plan Fee Arrangements
      4. Current Practice
    9. Chapter 21: Why Fees?
      1. First: Unlike in DB Plans, in 401(k) Plans Fiduciary and Participant Interests Are Not Aligned
      2. Second: Fees Have a Significant Effect on Retirement Outcomes
      3. Third: Plan Fiduciaries Limit Participant Investment Choices and Negotiate the Deal with Plan Service Providers
      4. Academic Work on Fees
    10. Chapter 22: 401(k) Plan Fees and Fiduciary Regulation
      1. Fee Disclosure
      2. Provider-to-Sponsor Disclosure Rules
      3. Sponsor-to-Participant Disclosure Rules
      4. The Fiduciary Rule, Round 1
      5. Round 2
      6. The Fiduciary Rule in Brief
      7. A New Set of “Impartial Conduct” Standards
      8. Regulation of Compensation Policy
      9. Disclosures
      10. Contract Requirement for Non-ERISA Plans and IRAs
      11. Implementation, Criticism, Challenges
      12. Fifth Circuit Vacates the Fiduciary Rule
      13. Assessing Fee Regulation Efforts
    11. Chapter 23: Fiduciary litigation
      1. The Problem of Proof
      2. “Generic Services”—Recordkeeping
    12. Chapter 24: Fiduciary Best Practices and Managing Fiduciary Risk
      1. Key Process Elements
      2. A Broad Range of Alternatives
    13. Chapter 25: An Adequate Payout
      1. The 401(k) Payout Challenge
      2. Individual Choice vs. the “Right Choice”
    14. Chapter 26: Intermezzo—Plan B
      1. Continued Work—the Good News
      2. The Other Plan B: Moving In with the Kids
      3. The Worst Case
      4. For the Most Part, a First World Problem
  11. Part III: The Future
    1. Chapter 27: The Demographic Background
      1. The Age-Old Problem of Old Age
      2. The Wealth Transfer Paradigm
      3. The Socialization of the Paradigm
      4. Money versus Time
      5. Turning Savings into Investment
    2. Chapter 28: The Great Transition
      1. The Ratio of Workers to Retirees Is Going to Go Down, Significantly
      2. In the Transition from PAYGO to Funding, Someone Will Have to Pay Twice
      3. The Transition to the 401(k) System Caught Baby Boomers Mid-Career
    3. Chapter 29: Covering the Uncovered
      1. How Big Is This Problem?
      2. What Sorts of Employers Don’t Provide Plans?
      3. What Is Preventing Smaller Employers from Implementing Workplace Retirement Plans?
      4. Reducing Administrative Burden and Cost
      5. Increasing Incentives
      6. And the Gig Economy
    4. Chapter 30: The Implications of the Software Revolution for Retirement Savings
      1. The Current System
      2. The Distributed Ledger Technology Revolution
      3. Are There Situations in Which Friction Is a Feature, Not a Bug?
      4. Are There Situations in Which Transparency Is a Bug, Not a Feature?
    5. Chapter 31: The Role of the Employer
      1. What Is in All This for the Employer?
    6. Chapter 32: The Bureaucratization of Capital
    7. Chapter 33: Coda
      1. What is Retirement?
      2. The Way Forward
  12. Index