As the most recent president of the Plan Sponsor Council of America, it should come as no surprise that David Wray is effusive about 401(k) plans. That "the defined contribution system has continued to thrive through these last five years [during the recession and fitful recovery] is an amazing story, and it's not been told," he says. "It's the one place people have continued to invest and save for the long term, which is enormously beneficial to our whole country."
When PSCA went looking for a new president in 1987, it found the perfect candidate in Wray, who understood the legislative process thanks to the years he spent early in his career working in both the Colorado and Iowa Houses of Representatives. In 1980, he'd moved to what was then known as the Alliance of American Insurers, where he'd gained lobbying experience, association management skills and had managed the association's 401(k) plan.
Wray, who retired from his PSCA post in September, sat down with EBN recently to discuss his legacy, the highlights of his career and the biggest challenges facing 401(k) plan sponsors today.
EBN: What would you like your legacy to be?
Wray: That I facilitated the development of a regulatory structure so that 401(k)s could be a widely available program, and that I facilitated the educational process that transitioned the understanding in the American workforce that they could not just rely on some third party if they were going to have the kind of financial independence in retirement that they wanted.
And both of those things have happened. We have an excellent regulatory structure - a combination of regulations and incentives - that has seen a wide expansion of the system. And if you ask any worker today if they should be saving for retirement, they will say yes. And that's a big change from when I started.
EBN: What have been some of the highlights of your tenure at PSCA?
Wray: When I came on board [at PSCA], the tax law said that if you had more than a certain amount of money in the plan, you had to pay a 10% excise tax. That was repealed.
A second issue that was really important was that, back in the early nineties, there was an attempt by very large states with very high tax regimens to impose a system where participants would have to determine the location of the accumulation in their final retirement [accounts] and pay appropriate tax to the state at that time. Of course, this would have made the defined contribution system nearly inoperable. The recordkeeping, the incredible complexity of filing tax forms - it would have negatively impacted the system. We facilitated the federal law that said these are federal programs and, as a result, the federal government could require that the state tax paid on distributions from these programs can only be levied by the state in which the participant lives at the time the distribution is made.
Third, with the passage in 1988 of the government's limit on the amount of money that could be counted in plans, we looked at the structure of the limitations and concluded that the structure would enormously restrict retirement savings. We began working on a package of changes that would greatly simplify that structure that would separate the employer contribution calculations from the 401(k) calculations that would increase the limits. We were rewarded in 2001 with the passage of virtually all of the things we wanted. We really opened up the system to significant design flexibility for companies and raised the limits of what people could save.
My final satisfying accomplishment is that the PSCA helped facilitate a nationwide campaign to calm the waters for 401(k) participants [during 2008's financial crisis]. The panic that was underway during this period was enormous, and the retail investors were fleeing the markets in the millions. 401(k) participants were terrified; there was real concern they would bolt the system. There was a national effort by plan sponsors and providers that told participants they could trust the system, and we convinced them they didn't need to take action. At a time when virtually the entire world was rushing to the bunkers, 401(k) participants stayed the course. That is the final thing for which I am proud - that we were one island of stability in this catastrophe.
EBN: What do you make of increased participant fee disclosure? Is this a good direction for the industry?
Wray: I was chairman of the ERISA Advisory Council when it called for fee disclosure to participants. The purpose of fee disclosure to participants was not that it would cause some major reallocation in the system. The reason participant fee disclosure is important is because we've been pounded in the media with the false statement that fees in 401(k) plans are high, that employees are being taken advantage of. It's a total falsehood, with very few exceptions and those are mostly at very small companies.
The importance of fee disclosure to participants is about system credibility. The 401(k) system has to be trusted by participants. My belief is we will eventually see studies that show 401(k) fees are far lower than what retail investors pay anywhere in the world, certainly less than what people pay in IRAs.
EBN: Some providers are pushing annuities within 401(k) plans. What do you make of that movement?
Wray: Defined contribution plans, by their nature, are accumulation vehicles. And when a person reaches retirement, then that money needs to be managed in a way that fits the individual need of the participant, which varies enormously across the board. For some, annuitization is going to be critical. For others, partial annuitization is the answer. For others, no annuitization is needed. So what's critical is that there's the opportunity to annuitize in a customized way.
When you have an investment in the plan that underperforms, you can phase it out and replace it with something else. When a person has bought an annuity, it's a lifetime commitment with the provider. If there's a problem with the provider, you cannot have a system where people could come back and sue the plan sponsor. Plan sponsors cannot stand that liability, and they have made that clear.
EBN: What do you see as the biggest threat to the current retirement system - plan design, the economy, federal regulations, participant inertia?
Wray: The threat is real, and it is the fact that, however we got here, we're in a situation where federal expense exceeds federal revenue. You cannot continue this level of debt accumulation because at some point, servicing the debt will squeeze out payments for all the other services the government has to do. So the threat to the system is that when we go through the process of dealing with this [deficit] situation, the changes that are imposed onto the defined contribution system to help address this will damage the system fundamentally.
People in this discussion will talk about how much we're going to reduce the home mortgage exemption or how much charitable contribution incentives are going to be reduced; there will be an adjustment to all of these programs. The danger is that the defined contribution system will take a hit because it's not the first priority of anybody, with the exception of PSCA and a few employee groups. Virtually every other significant lobbying organization in the country has other priorities, and they will be happy to preserve - to the extent they can - their incentive program at the expense of the defined contribution system. Without significant effort, the power politics of the process could dramatically reduce the amounts that can be saved in the plans. And if you make the plans uneconomic, especially for small employers, the plans will be terminated. The system is definitely more vulnerable than a lot of people think.
EBN: There are some in the retirement industry who think the 401(k) needs to be scrapped because it doesn't help plan participants save adequately. What do you make of that assertion?
Wray: A lot has to do with how Social Security will be managed going forward. My suggestion has always been we need to talk about realistic targets for adequacy. A lot of people have chosen adequacy targets that far exceed what is necessary. Most people who retire from a 401(k) plan are going to be making $50,000 [a year] when they retire. They're going to have a substantial benefit from Social Security, and it doesn't take that much money to deliver an 80% replacement ratio.
The attack on adequacy is often based on the current average account balances. Most people, when they retire, have worked maybe 15 years with their final employer. The point of a defined contribution program is that you can save for 40 years. But you're not going to do that with your final employer because people don't work for 40 years for one employer. So we're seeing enormous amounts of accumulations outside of the current employer's plan. People have a lot more money and will have a lot more money in the system when it's had a full 40-year experience, which is still a decade or two away.
EBN: Overall, would you say the 401(k) system is a success or a failure?
Wray: It has been a dramatic success. Follow the money. Between the current accumulations in defined contribution plans and IRAs - because the IRA system is part of the defined contribution system - we have $9 trillion. That's an enormous amount of money, and it increases all the time. It will surpass at some point the entire value of personal real estate in the country.
EBN: Do you ever see a time in the future when employers might return to the richer, defined benefit plans of the past?
Wray: No. Employers have benefit plans to attract, retain and motivate workers in their employee environment. It is clear that employees do like defined benefit plans, and my sense is that at some point in the future - when the current DB system is run off and the plans that are left are truly well-funded and we're starting from scratch - that some employers will add considerably less generous defined benefit plans to complement their defined contribution program. And these will be liability-matching-funded so there will be no ups and downs in the funding, and the benefits will be considerably less robust.
EBN: The U.S. retirement system used to feature the three-legged stool of Social Security, personal savings and workplace retirement plans. With all three legs looking pretty wobbly these days, how can the stool be propped up, so to speak, to better achieve retirement security?
Wray: First and foremost, we need a growing economy. If the economy doesn't grow, none of this is going to work. We have a demographic difficulty facing the country [and] all of these programs require that the economy be robust.
We need to do what we can to make sure Social Security, to the extent possible, delivers the promised benefit. Taxes were hiked on baby boomers [in 1983], and a promise was made that if the government could collect all of this money in this period before the baby boomers retired, then the baby boomers would retire with benefits. People acted on that promise. And that decision to raise those taxes limited the amount people could save for retirement.
So, it is really important that we meet the promises that were made. It's a hard, difficult thing to do in these economic times, and we clearly have to figure out how to do that.
EBN: Any final thoughts?
Wray: The point I try to make with people is how phenomenal it is that the defined contribution system has continued to thrive through these last five years. What people don't appreciate is that when everyone else is selling, the defined contribution system is buying. We are net buyers of equities. We are stabilizing the markets. Crashes would be far deeper and more disastrous and damaging had there not been defined contribution buyers.Â
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