Labor’s Love of 401(k)s Thwarts Bid for Reform
When lawmakers declared they would seek sweeping new protections for the nation’s retirement system in the wake of Enron’s collapse in December, you could have predicted some of the opponents: corporate types interested in preserving arrangements that ensure cushy tax breaks, free marketeers fearful of any extension of government power and so forth.
But add to the opposition an unusual ally: the American labor movement.
Top labor leaders quietly refused to support the most stringent congressional proposal, one that would have taken an important first step toward affording 401(k) accounts the same protections that have long applied to traditional pensions.
In interviews, officials with the nation’s largest labor group, the 13-million member AFL-CIO, insisted their opposition to a so-called company stock cap was largely tactical. They feared the measure would galvanize corporate opposition against any reform.
But the officials conceded they also were influenced by internal polls showing that union members are deeply enamored of their 401(k)s, often to a greater extent than they are of their financially more important and far less risky union-won pensions.
“Our people just value their ability to make their own personal decisions. They trust their own investment decisions more than they do anybody else’s,” said Jerry Shea, chief policy advisor to AFL-CIO President John J. Sweeney.
Worker infatuation with 401(k)s and organized labor’s opposition to strict limits on how they can be invested illustrate how extensively the investor culture of the 1990s penetrated the nation. And continued enthusiasm for individual retirement accounts even after two years of stock declines suggests how powerfully the idea of hitting it rich in the markets still grips America.
The combination, many retirement policy experts fear, could prove fatal to any kind of thorough-going reform.
“There’s a fundamental disconnect between people’s fondness for 401(k)s as a personal investment vehicle and the fact that they are, first and foremost, key elements of our nation’s retirement system,” said J. Mark Iwry, who as the Treasury Department’s tax benefits counsel from 1995 to 2000 was one of the nation’s top retirement plan regulators.
“The 401(k) would not exist without the generous tax advantages provided by law. Those advantages are designed to ensure Americans have adequate and secure income to live on when they retire.
“It makes no sense to provide tax breaks, then do nothing to protect the accounts from the kind of imprudent investment that occurred at Enron,” Iwry said.
More than 20,000 Enron employees lost most of their retirement savings when the Texas energy giant collapsed, dragging the workers’ 401(k) accounts, which had been chockablock with company stock, down with it. The losses were particularly galling because they came as top executives were simultaneously selling off large blocks of their own stock and encouraging subordinates to keep on buying.
The resulting public outcry sparked broad initial support for a proposal by Sens. Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.) to slap a 20% cap on the amount of company stock permitted in a 401(k).
Policy experts said the stock cap idea represented a first, tentative attempt to cope with what amounts to a sea change in the nation’s retirement system over the last two decades, one with potentially dire consequences for how the baby boom generation will live once it stops working.
Unlike most advanced industrial nations, which have public retirement systems designed to replace most of a worker’s income when he or she stops working, America’s Social Security system replaces only up to about 40% of pre-retirement income. Americans are expected to look elsewhere for the rest.
For much of the postwar period, the “elsewhere” was chiefly the private pension.
Employers managed pots of money to ensure they could pay retirees. Washington encouraged the process by offering big tax breaks while protecting workers by imposing a 10% cap on company stock, requiring broad diversification of investments and guaranteeing payment of benefits.
Beginning in the early 1980s, the government also began encouraging individuals to save for retirement by offering tax breaks for salting away funds in 401(k)s and similar accounts. In these, the risk for their performance rested with individuals rather than employers. But Washington did little to regulate them largely on the theory they were mere sidelights to pensions.
However, the longest bull stock market in U.S. history turned the retirement world on its head by convincing people they could use the individual accounts to take care of their own retirement needs.
By now, there are more people dependent on individual accounts than pensions, more money going into them and bigger tax breaks devoted to encouraging them, according to the Employee Benefit Research Institute.
The Bush administration estimates the government will provide $60 billion in tax breaks this year underwriting 401(k) accounts, compared with $53 billion on traditional pensions. These add up to the single biggest tax break that the government offers--almost double the much better-known mortgage interest deduction.
In the popular imagination, they have taken over so thoroughly that, despite stark evidence to the contrary, many Americans believe 401(k)s will be the chief source of their retirement income.
“People have some deep misunderstandings about these accounts,” said top Washington pollster Mark Mellman. That includes union members with top-flight traditional pensions as well as 401(k)s.
“We’ve polled employee groups with pensions that guarantee they’ll get 70% or 80% of their income after retirement and 401(k)s with only $10,000 or $15,000 in them, and three quarters or more still think their 401(k)s will provide most of their retirement benefits,” he said.
In fact, despite the wild popularity of 401(k) accounts, the average account balance for all Americans at the end of the longest boom in U.S. history was barely $49,000--not enough to even begin delivering an adequate retirement income.
“It’s absurd, but people have been led to believe their 401(k)s will take care of them,” Mellman said.
That was the backdrop when unions began backing away from their initial support of the proposed 20% limit on company stock in 401(k) accounts .
AFL-CIO officials convened a series of private meetings with affiliate unions in January and February to gauge support and found very little.
“There were people there,” said Robert Patrician, a research economist with the Communications Workers of America, “who felt that members did not want to be restricted in investing their tax-advantaged dollars.” Nor did the union officials want to be the ones to tell the members what was good for them.
Officials also began hearing from members like Joseph M. Furst, a former General Electric salesman from Rocky Hill, Conn., who adamantly opposes applying to 401(k)s the same rules the government imposes on traditional pensions.
“The government wants to mandate everything,” the 62-year-old retiree complained. “They mandate the design of your car. They mandate the design of your toilet. Now they want to mandate where you can invest your money.”
Furst said he has doubled the value of his 401(k) since taking early retirement five years ago by putting virtually all of it into GE stock. He said he has no worries he could suffer a fate similar to that of Enron workers.
The combination of reluctant union leaders and angry union members proved potent. Lawmakers quickly rallied around a compromise that, by focusing only on firms without traditional pensions, left organized labor largely untouched.
Under a measure advanced by Sen. Edward M. Kennedy (D-Mass.), companies that don’t have pensions like those offered by most unionized firms would have their right to use company stock in retirement plans somewhat restricted. In addition, the firms would have to let employees unload company stock from their 401(k)s after three years.
But the idea of an outright cap on company stock would be dropped.
A defeated Corzine said in a statement last week that “as a pure policy matter” he still believes a cap is the best approach. But he added, “I support the Kennedy proposal as a viable compromise . . . to protect workers’ retirement savings through diversification.”
