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Whose Money is it Anyway?
By: Merton Bernstein and Teresa Ghilarducci
Although some 50 million Americans participate in pension plans with $6 trillion in assets, our national institutions -- Congress, firms, enforcement agencies -- have suffered from attention deficit disorder about these plans' inadequacies. Now, rudely awakened to find the pension cupboard bare for rank and file employees of Enron, Global Crossings, Polaroid and more, we fumble with rules that failed to prevent past abuses. Indictments will not achieve a cure. Only structural change will prevent the fresh abuses sure to come. On average, employer stock makes up about 20 percent of
401(k) assets, but in many plans, sponsor stock holdings exceed 50 percent.
It may seem that employees are being foolish and ignoring the warnings of
folk wisdom to not put all their eggs in one basket. But employers have
powerful ways to make their workers hold too much employer stock. One
outrageous tactic is to prevent workers under age 50 from selling stock
while company insiders sell theirs freely. Also, many employers stealthily
make workers pay the high fees of frilly 401(k) services, causing pension
accounts to erode by 20 percent to 40 percent. Yet, even mild bipartisan
proposals to allow workers to sell stock after three years and equalize
rules between workers and executives are facing fierce opposition by
employer groups. Reasonable remedies to limit the percentage of company
stock in tax-favored retirement accounts is also encountering near-fatal
turbulence in Congress. Though taxpayers subsidize pensions by not collecting
taxes on retirement accounts, and workers pay for them by accepting lower
wages, company executives make almost all the crucial investment decisions
and select all the pension managers and advisers. In addition, employers can
make use of up to 10 percent of traditional pensions and up to 100 percent
of 401(k)s by constructing assets to be all in company stock. More subtly, the actuaries, accountants, lawyers and
depositories become clients of the company, though officially they work for
the plan. The professionals get and keep their business by satisfying the
plan sponsor's top officials. Need we say more than "Arthur
Andersen" to make this point? In those circumstances, employee/retiree
interests come second -- that is, last. And yet some pundits say requiring worker trustees on
pension boards would capsize any pension reform. But, employee-employer
joint administration is exactly what we need. We must change the structure of pension control to
prevent abuse. We must make it nearly impossible for employer plan sponsors
to use plans to enrich insiders and the sponsoring company. To that end,
plan sponsors should no longer control major plan decisions or, indeed, even
day-to-day operations. Instead employees and retirees should control the
plans through representatives of their own choosing. At the very least,
their representatives should have an equal say in plan decisions and
oversight. Such an arrangement would wall off plan assets from
corrupt misuse and conflicts of interests, and experience shows that it
promotes retirement saving. From 1984-96, employer contributions to 401(k)
plans administered solely by employers declined by 20 percent, while worker
contributions to such plans rose by 51 percent. In contrast, where employee representatives served on
the plan board, employer contributions rose by a respectable 8 percent and
employee contribution increased 563 percent -- and that isn't a typo. Worker
representatives seem to help sell the saving idea by making employees more
aware of the program. While many regard 401(k)s as a fabulous innovation
promising employee wealth, less than half of eligible employees actually
participate. Less than half of full-time employees have pension
coverage, and these are already the best-off financially. Participation is
especially sparse among women and minorities. Retirement plans receive the
largest chunk of tax subsidies, even more than home mortgage interest
deductions -- more than $500 billion in the first five years of this
century. That blows a sizable hole in the federal budget. Taxpayers and employees deserve plans that actually produce secure retirement income. This can be achieved only if employees and retirees, under federal supervision, are allowed to exercise effective control over their retirement money. Merton Bernstein is an emeritus professor of law at
Washington University and author of "The Future of Private
Pensions." Teresa Ghilarducci is an associate professor economics at
the University of Notre Dame and author of "Labor's Capital: The
Economics and Politics of Private Pensions." FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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