A Retirement Plan for Job-Hopping Workers

Congress has spent the last year debating 401(k) reform in response to the Enron disaster. But the honorable members should stop gazing into the rearview mirror. Today’s private pension plans were designed for another era. Employer-sponsored pensions worked much better in yesterday’s industrial economy with its more permanent workforce.

Workers, on average, now change jobs nearly 10 times by the age of 36, according to the U.S. Bureau of Labor Statistics. A vastly different approach is needed.

But never mind the big picture. It’s much easier for politicians to fiddle with a few details. Will they cap the amount of employer stock that can go into 401(k)s at, perhaps, 20%, as many Democrats prefer? That still would leave retirement savers vulnerable to business debacles.

Most Republicans want to give workers the choice to sell company shares after holding them for, say, three years. But that’s not so reassuring either, as long as what passes for corporate accounting leaves investors and employees in a fog about true financial performance.

Those in the nostalgia crowd, for their part, have been dismissing the entire 401(k) movement as a mistake. And they’re getting traction, after two years of stock market declines and the trauma of corporate scandals. They want to replace 401(k)s, a concept that dates from the 1970s, with an earlier idea: the defined-benefit pension that caught on in a big way during the 1940s and 1950s. These plans make monthly retirement payments based on previous earnings and length of service to a single employer.

Quite a few traditional defined-benefit plans are still around, but they stand no chance of meeting the needs of most people in today’s -- much less tomorrow’s -- labor force. The pensions are “back-loaded,” meaning they don’t begin to grow by much until workers have spent many years at the same company. At least the money in 401(k)s is portable.

As many as one-third of all workers have become “free agents”: the self-employed, independent contractors, small-business owners, temporary employees, professionals in solo practices. Today’s pensions serve these people poorly. And half of all working Americans have no pension coverage at all.

Some longtime proponents of traditional defined-benefit plans are starting to look for a better way. “The question in the post-Enron era,” says Michael S. Gordon, a Washington attorney who helped draft the Employee Retirement Income Security Act of 1974, “is whether employer-based private pensions have become so untrustworthy and inefficient that they should be replaced by something less problematic.”

The U.S. Treasury will give up $126 billion in revenues this year in order to encourage retirement saving through employer-sponsored plans. That’s the largest “tax expenditure” after the mortgage-interest deduction. But companies have been extremely clever about using this subsidy for things that have nothing to do with preparing for old age.

Businesses, for example, constantly use “surplus” money from traditional defined-benefit plans to pad their bottom lines. Assumed investment returns boosted the reported operating earnings of S&P; 500 companies last year by an unprecedented extent, according to a study released by the investment firm Morgan Stanley. But the reality was not nearly as rosy because actual returns failed to match the assumptions.

This is just part of the enormous problem with corporate accounting. Almost $300 billion in pension surpluses, meanwhile, has vanished since 1999 as a result of poor stock market returns and changes in the terms of the plans.

The 401(k) abuses flow from the same conundrum. Enron’s 401(k) fiasco never would have happened if Congress had not created an impossible conflict when it passed the retirement income security act. The act pushed corporate executives into unlikely roles as plan “fiduciaries,” legally obligating them to protect the interests of plan participants.

The law, in other words, put foxes in charge of the chicken coop. What businessman worth his salt would turn thumbs down on the chance to make money for his company in order to shield workers from losses in their retirement plans?

Companies, not surprisingly, have gone out of their way to issue stock to their 401(k) plans in order to keep the companies in friendly hands. And plan participants have sued a long list of companies, in addition to Enron, alleging breach of fiduciary duty in connection with investments in employer stock. Rite Aid, Lucent Technologies, Nortel Networks, Qwest, Williams Cos., Providian Financial Corp., Ikon Office Solutions, WorldCom and Xerox have been among them.

America needs a new generation of employment-based, not employer-based, retirement saving vehicles. Call them “Triple-A pensions,” ideal for workers on the move.

The American Automobile Assn., Kaiser Permanente, Blue Cross/Blue Shield and other large, independent insurance carriers all could make excellent sponsors. Congress should give the new Triple-A plans, with independent third parties behind the wheel, the same valuable tax treatment enjoyed by traditional defined-benefit plans and 401(k)s.

Employers should welcome the new plans. Group contracts, no doubt, would cut costs. And employer contributions would make them a breed apart from today’s IRAs.

But the ultimate beneficiaries would be retirement savers, and they have needs that aren’t being met with current pension plans. Many would be better off in a defined-benefit plan, but without back-loading. Such a thing, unfortunately, doesn’t exist in today’s marketplace. Workers should have better choices at four stages:

* they should be able to choose a Triple-A plan or to stick with the old way;

* savers, once in a Triple-A plan, should decide whether and to what extent they want to take a defined-benefit approach;

* Triple-A plans should offer a menu of cost-effective investment choices, unlike most 401(k)s and IRAs today;

* annuity choices should be attractive. Only TIAA-CREF, the 401(k)-type system for many college professors, private school employees and others, seems to have made a serious effort to provide retirement payments that protect retirees against inflation and other risks of living longer than expected. Not surprisingly, the market for individual retirement annuities today is minuscule.

This may be a propitious time to introduce Triple-A pensions. Companies that, until recently, used traditional defined-benefit plans to puff up their bottom lines will be paying for this legerdemain for years to come. Many will be sorely tempted to switch to 401(k)s. Workers, however, will be leery. That’s one more reason why Triple-A pensions could be the best way forward. But it won’t happen until Congress stops staring into the rearview mirror and takes a sober look down the road ahead.