Commentary JAne wHite
the case for requiring 401(k) Providers
to Hire Pension Actuaries
I COnSIDER mYSELF FORTunATE to be the daughter of a pension
actuary and the wife of a health care actuary. Both my dad’s and my
husband’s career choices were timed well. my late father helped companies set up pensions between the early 1950s and the late 1970s—a
period when pension coverage in the u.S. was at an all-time high. my
husband, among other consulting activities, helps employers rein in
health care costs at a point when they are consuming 16 percent of
gross domestic product.
Unfortunately, the 21st century
doesn’t offer the same kinds of career
opportunities for pension actuaries as
the 20th century did for my dad. From
1974 to 2004, the proportion of Americans covered by a defined benefit (DB)
plan shrank from 44 percent of the work-
than those in DB plans. It’s that the employer contribution rate, typically equal to
3 percent of pay, is the second lowest in
the world. In Australia, where employers
are required to contribute the equivalent
of 9 percent of pay to their version of our
401(k), the typical worker is looking at an
account balance of $500,000 to $700,000
at retirement, versus around $100,000 in
the U.S. (And yes, this is on top of Australia’s version of our Social Security system.)
force to 17 percent of it, according to the
Employee Benefit Research Institute. At
the same time, more than 60 percent of
the workforce is employed by companies
that offer only a 401(k) option. What’s remarkable about this downward trend is
that while the Employee Retirement Income Security Act has been amended at
least 40 times in the past 30 years, the result is less retirement security, not more.
What’s the problem with 401(k)s?
Contrary to recent reports, it’s not necessarily that their investments are riskier
an accidental Pension
In reality, the 401(k) option is an accidental pension intended to capitalize on
tax breaks and add security to an existing DB plan—not replace it. Since there
are no rules for funding 401(k)s, pretty
much the only role pension actuaries
play is to help employers follow rules
such as “nondiscrimination” testing that
prevent highly paid people from contributing enough to their accounts. Although
401(k)s are called defined contribution
plans, to my knowledge nobody has ever
attempted to require that the contributions be defined so that the participant
can retire with a benefit as generous as
that of a DB plan.
What’s more, the necessary nest egg
that 401(k) participants need to accumu-
late is rarely, if ever, defined. Few people
outside of the actuarial community know
that, lacking a pension, you’ll need to have
accumulated the equivalent of 10 times
your final pay, or your salary before retire-
ment, in your current 401(k) and rollover
accounts in order to be able to retire (un-
less your income is so low that most of it
is replaced by Social Security).
