Senator Obama's pension proposals

Senator Barack Obama (D-IL) has made a number of (relatively) concrete pension reform proposals. In this article we evaluate them. Our focus in this article is on Senator Obama's proposals that will affect private pension plans. Thus, we will not be addressing, for example, Senator Obama's Social Security proposals. With respect to private pension policy, we identify three major Obama-supported initiatives.

We are focusing on Senator Obama's proposals because, if Senator Obama wins, the issues addressed in these proposals are likely to be priorities for his Administration. Moreover, even if he does not win, these proposals highlight issues that are likely to be of concern to Democratic policymakers generally.

We would like to emphasize that our purpose is neither to criticize nor to praise these proposals or Senator Obama, himself. Rather, in view of the specificity of these proposals, we believe it is useful to evaluate them from a sponsor's point of view. At the end of the article, we excerpt Senator Obama's proposals in detail. As of this date, Senator McCain (R-AZ) has not yet provided a concrete set of pension policy positions. When (and if) he does, we will provide a similar review of them.

"Automatic Workplace Pensions" plus Expanded Savers' Credit

Senator Obama's automatic workplace pension proposal would generally require companies that do not offer retirement plans to provide payroll deduction IRAs into which employees would be automatically enrolled. The Savers' Credit would be made refundable and the full 50 %/$1,000 match would be provided for families earning under $75,000.

As we have discussed in our article The next 401(k) policy initiative: adequacy, this combination of expansion of automatic enrollment and of the Savers' Credit is advocated by many Democratic policymakers as a key solution to the problem of inadequate retirement savings among relatively low-paid workers.

While these proposals will not (generally) affect employers who provide a retirement plan to most employees, companies with large uncovered groups will be affected. The proposal recognizes concerns about possible administrative burden. And one would expect that reasonable accommodations would be made to mitigate the cost of compliance.

Two additional elements of the automatic workplace pension proposal may be of concern to sponsors generally. First, the proposal would "require annual disclosures to plan participants that detail in clear and simple language the amount of fees incurred and investments made." Senator Obama’s website does not make it clear whether this proposal would apply just to the new payroll deduction IRAs or to all employer plans. In either case, in all likelihood this element of the proposal would be wrapped into whatever broader fee disclosure initiatives are undertaken by the new Administration. A particularly interesting question in that regard, however, is whether, if the current Administration manages to finalize new fee rules, a new Administration will undertake to re-open the issue.

Second, the proposal would "require that businesses choose a default investment plan that has an investment portfolio similar to that of the federal Thrift Savings Plan, low-management fees and does not include company stock." This element of the proposal reflects Senator Obama's commitment to low-cost passive management, a commitment shared by Congressman Miller (D-CA), Chairman of the House Education and Labor Committee. How far this policy position will be pursued -- Congressman Miller's fee bill mandates inclusion in (most) 401(k) plans of at least one index fund option -- will be another big question in any Obama Administration.

Finally, let's note that some policy advocates believe that tax credits, which provide the same absolute dollar tax benefit regardless of tax bracket (and, where the credit is refundable, regardless of whether taxes are paid) are "fairer" than the current system based on tax deductions and exclusions. While Senator Obama is favoring making the Savers' Credit refundable, he has not come out for a conversion of 401(k) plans generally to a tax credit basis.

Pension investment transparency

Under the proposal, employees would receive "annual disclosures about their pension fund's investments, including full details about which projects have been invested in, the performance of those investments and appropriate details about probable future investments strategies." Concern about defined benefit (DB) plan "asset quality" is an emerging accounting issue -- see our article "Financial reporting of pension and postretirement benefit plan assets." And, in comments to the Financial Accounting Standards Board (FASB), the Pension Benefit Guaranty Corporation has identified DB asset quality as a concern.

To the extent that Senator Obama's proposal for more disclosure about DB asset quality parallels FASB's efforts, whatever new administrative burdens are imposed (for example, in gathering asset data) are probably inevitable. Many commentators to the FASB questioned how useful this information would be to analysts. Those questions go double for participants, who are generally less sophisticated than analysts. It's hard to anticipate just what sort of pressures sponsors will face if they have to provide detailed DB investment strategy information to employees. And it's fair to ask whether participants are in the best position to evaluate DB investment strategy.

This is an evolving issue. We would expect further discussion and debate about the form of delivery of this information and, perhaps, whether it should be, in effect, broadcast to participants.

Reform corporate bankruptcy laws to protect workers and retirees

It's probably best here to quote Senator Obama's proposal in detail. An Obama-reformed bankruptcy code would:

Put promises to workers higher on the list of debts that companies cannot shed.

Ensure that the bankruptcy courts do not allow companies to demand more sacrifice from workers than from executives when companies fall on hard times.

Protect the jobs and benefits of workers and retirees when corporations file for bankruptcy by telling companies that they cannot issue bonuses for executives during bankruptcy while their workers watch their pensions disappear.

Increase the amount of unpaid wages and benefits workers can claim in bankruptcy court against their employer.

Limit the circumstances under which retiree benefits can be reduced.

For the most part companies will be able to evaluate for themselves how these proposals will affect, for example, their executive compensation programs. One point to consider -- to the extent that this reform would elevate pension claims above those of other creditors, the ability of cash-strapped companies to borrow may be compromised. Understanding the secondary and tertiary effects of this proposal may be critical, but a detailed analysis of those effects is well beyond the scope of this article.

Conclusion

Senator Obama's proposals reflect some broad concerns -- many shared by Republicans -- about the current US retirement system: breadth of coverage and adequacy of benefits; transparency and disclosure of fees; the solvency of certain DB plans and who must bear the cost of winding those plans up. In many cases, positions on these issues have not polarized, and depending on how things go in the next four years, they may never polarize. Another round of corporate bankruptcies/pension defaults or a highly publicized fee scandal could change that.

In a related article, What pension policy issues are at stake this November, we discuss current high-priority pension policy concerns, how the parties line up, and what events might provoke a stronger Democrat-Republican divide on them.

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The following is excerpted from the fact sheet "HELPING AMERICA’S SENIORS" provided on Senator Obama's web site.

Create Automatic Workplace Pensions

[E]mployers who do not currently offer a retirement plan, will be required to automatically enroll their employees in a direct deposit IRA account. Obama’s plan will give options to the self-employed to access new easy-to-enroll savings plans and direct the IRS to deposit tax refunds into those savings plans for people who choose to save some of their refunds. Under the Obama plan when employees change jobs, their savings will be automatically rolled over into the new employer’s system to ensure continued savings.

To minimize administrative burdens on employers, Obama will set up a direct-deposit system that is compatible with the existing direct-deposit payroll system that most large employers already utilize. For most firms, offering payroll deduction IRAs will involve little cost since the employer will not be maintaining a plan; rather they would be acting as a forwarding agent for employee contributions. In addition, Obama will make temporary tax credits available to firms to defer the cost of establishing these plans. Firms with fewer than 10 employees or who have been in business for less than two years will be exempt from this requirement, but may take advantage of this low-cost opportunity to offer a saving plan for their employees if they so choose.

Obama will also require annual disclosures to plan participants that detail in clear and simple language the amount of fees incurred and investments made. This measure will help ensure that retirement plans actually help workers over time, rather than investment and consulting firms. Obama will also require that businesses choose a default investment plan that has an investment portfolio similar to that of the federal Thrift Savings Plan, low-management fees and does not include company stock.

Expand Retirement Savings Incentives for Working Families

Barack Obama will [create] a generous savings match for low and middle-income Americans. Obama will expand the existing Savers Credit to match 50 percent of the first $1,000 of savings for families that earn under $75,000, and he will make the tax credit refundable. [T]he savings match will be automatically deposited into designated personal accounts by using the account information listed on IRS tax filings.

Require Full Disclosure of Company Pension Investments

Barack Obama believes we must ensure private companies properly fund their pension plans so taxpayers do not end up footing the bill. However, even when companies fund their pensions, many do not disclose their investments with the employee’s pension dollars. This lack of transparency can make it easier for fund managers to make imprudent or even fraudulent investment decisions. Obama will ensure that all employees who have company pensions receive annual disclosures about their pension fund’s investments, including full details about which projects have been invested in, the performance of those investments and appropriate details about probable future investments strategies.

Reform Corporate Bankruptcy Laws to Protect Workers and Retirees

Workers and retirees risk losing everything when their company goes bankrupt. Too many employees have worked hard, played by the rules and contributed to private pensions only to find themselves left in the lurch when their companies went bankrupt.

Current bankruptcy laws are designed to protect banks before workers by helping companies get capital to get back on their feet, but in so doing it has made it easier for bankrupt companies to shed pension and health care obligations to retired workers.

Barack Obama has supported efforts to force firms to put more money into their pension funds and make them solvent so workers aren’t left with a bunch of worthless IOU’s after thirty years of service. As president, Obama will:

• Put promises to workers higher on the list of debts that companies cannot shed.
• Ensure that the bankruptcy courts do not allow companies to demand more sacrifice from workers than from executives when companies fall on hard times.
• Protect the jobs and benefits of workers and retirees when corporations file for bankruptcy by telling companies that they cannot issue bonuses for executives during bankruptcy while their workers watch their pensions disappear.
• Increase the amount of unpaid wages and benefits workers can claim in bankruptcy court against their employer.
• Limit the circumstances under which retiree benefits can be reduced.

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