““The Economic Impact and The Economic Impact and Financial Trends of Pensions and Financial Trends of Pensions and

Retirement Plans”Retirement Plans”

National Press FoundationNational Press FoundationOctober 17, 2000October 17, 2000

James A. KleinPresident

American Benefits Council

American BenefitsAmerican BenefitsCouncilCouncil

– Advocacy Organization– Plans Covering 100+ million

Americans– Formerly Association of Private

Pension and Welfare Plans– “Benefits of Brevity”

Why is This Important?Why is This Important?Demography is DestinyDemography is Destiny

2000 - 35 million Americans over age 652050 - 81 million Americans over age 65

Population Projections Program, U.S. Census Bureau

Typical 45 year old has 40% of savings needed to avoid

a decline in standard of living. Merrill Lynch

45 year old without savings wanting to replace half ofincome, will need to save 22% of income for 20 years.

Committee for Economic Development

Why Is This Why Is This Important?Important?

Importance of Employer-Sponsored Benefits to Competitive Success of American Business

Today 76% “very important”10 years ago 36% “very important”

Harris InteractiveSeptember 2000

U.S. Retirement SystemU.S. Retirement System“3-legged stool”

– Social Security– Personal Savings– Employer-Sponsored Plans

4th leg: Earnings

A (Very!) Brief History of A (Very!) Brief History of Pensions and Retirement Pensions and Retirement

PlansPlans– American Express 1875– Late 1800’s/Early 1900’s - Railroad

Industry– WWII - Wage Controls– 1974 - Employee Retirement

Income Security Act (ERISA)– 1978 - First 401(k) plan– 1985 - Proposal to Abolish 401(k)

Plans

Types of PlansTypes of Plans– Defined Benefit (DB) Plans (e.g. traditional

pensions)• Benefit received is prescribed• Employer-funded• Guaranteed by PBGC• Not very portable

– Defined Contribution (DC) Plans (e.g. 401(k), 403(b), etc.)

• Contribution is prescribed• Employer and Employee funded• Investment gain/loss• Very Portable

– Hybrid Plans (e.g. cash balance)

Legal StructureLegal Structure

– Labor Law and Tax Law– Federal Preemption– Bifurcated Enforcement

• U.S. Department of Labor• U.S. Department of Treasury

– Bifurcated Oversight• Senate HELP Committee• House Education & Workforce

Committee• Senate Finance Committee• House Ways & Means Committee

Key StatisticsKey Statistics– 700,000 Private Retirement Plans

• 60,000 DB Plans• 640,000 DC Plans

– $4.4 Trillion in System in 1999 ($260 billion in 1975)

– Shift in Plan Coverage• 87% covered workers in DB plans (1975)• 50% covered workers in DB plans (1996)• 80% covered workers are in DC plans (1996)

– Only About 50% of Private Workforce is Covered by a Retirement Plan

Economic Role of Economic Role of PensionsPensions

– Hold About 20% of Equities– Hold About 17% of Corporate

Bonds– Largest Tax Expenditure: $72.4

Billion• Plus $14.6 billion for IRAs & Keogh plans• But it is different• Will this change?

Economic Role of Economic Role of PensionsPensions

– $1.00 Tax Expenditure Investment = $4.60 Benefit Return

– During Period of Deficits, Pension Savings Offset “Dissavings”

– Shift to DC Plans = More Investment Decisions Made by Individuals

– Continued In-flow Until Baby Boomers Retire

IssuesIssues– Complexity– Investment Education and Advice– Who is Hurt/Helped?– Then: Revenue

Now: Fiduciary Responsibility

Who has “A Lot” of Influence Who has “A Lot” of Influence on Congress on Retirement on Congress on Retirement

PolicyPolicyMedia - 62%Retirees/Seniors Groups - 51%Employees - 40%Plaintiff’s Lawyers - 23%Employers - 21%Financial Institutions - 11%Policy Think Tanks/Academics - 9%

Harris InteractiveSeptember 2000

Accuracy/Fairness of Media Accuracy/Fairness of Media CoverageCoverageAccuracy

Very Accurate 1% Somewhat Accurate 43% Not Very Accurate 46% Not At All Accurate 10%Fairness Very Fair 1% Somewhat Fair 38% Not Very Fair 51% Not At All Fair 11%

Harris Interactive September 2000

Stories Yet to Be Stories Yet to Be WrittenWritten

– Implications of Social Security Reform on Private Retirement Plans

– Linkage of “Retirement” and “Health” Policy

– Pensions as Source of Investment Capital

– Cash Balance Plans - Last Best Hope for DB Plans?

– Phased Retirement

Five Questions to Ask Five Questions to Ask When Preparing A When Preparing A

Benefits StoryBenefits Story1. Is the development or change specific to a single

company, or is it a trend in the industry, sector, or size of company?

2. What does the employer say about the development or change?

3. Ask a company executive: How does this change affect you as an employee?

4. Is this an accrued benefit or is it a future benefit?

5. What other reasons besides cost savings would prompt this action?

More Information?More Information?

www.americanbenefitscouncil.org