David L. Wray is the president of the Profit Sharing/401(k) Council of America (PSCA), a national, non-profit association of companies that sponsor profit sharing and 401(k) plans for over 6 million employees. He is a nationally recognized authority on 401(k) and other defined-contribution plan issues and he has testified before congressional committees and at Labor Department, Treasury Department, and Internal Revenue Service hearings. He was the 2004 chair of the Department of Laborâ€™s ERISA Advisory Council, which advises the Secretary of Labor on benefits issues, and was a member of the Certified Financial Planner Board of Standards Advisory Board. He frequently speaks before trade groups, contributes to benefits publications and is quoted frequently in the media. He has written “Take Control With Your 401(k)” which was published by Dearborn Trade in June 2002. He served as president from 1993 to 1996 of the International Association for Financial Participation (IAFP), a Paris based alliance of national organizations that promote the use of employee financial participation.
BrightScope’s Note: Today September 11th, 2009 the PSCA celebrates 401k Day. To read more about 401k Day please visit the website.
BrightScope: Can you tell us a little bit about the Profit Sharing Council of America (PSCA), your mission and how your organization has evolved over the years?
David Wray: The Profit Sharing/401k Council of America (PSCA) is a national non-profit association of more than 1,200 companies and their five million employees. Since 1947 has advocated for partnership in the workplace and increased retirement security through profit sharing, 401(k), and related defined contribution programs.Â PSCA offers best-practices information, unbiased research, technical assistance via our members-only helpline, and is a forceful voice for the system in Washington, D.C. Members receive monthly legal and legislative updates, a bimonthly magazine, as well as customizable participant education tools.
BrightScope: What tools do you make available for members of your organization to help them fulfill their fiduciary obligations?
David Wray: PSCA has a number of fiduciary aids that are available on our website www.psca.org. We provide two â€œRequest For Proposalâ€ models, a model investment policy statement, a fee disclosure worksheet, and a comprehensive list in our â€œConsiderations when choosing a service provider.â€
BrightScope: We just celebrated the 35-year anniversary of ERISA. Do you think that America’s private retirement system is accomplishing its objectives?
David Wray: The principle purposes of ERISA are to ensure that defined benefit pension plans offered by private employers are properly funded and that both defined benefit and defined contribution plans sponsored by private employers are managed for the exclusive benefit of participants and beneficiaries. I believe it is successful in accomplishing these purposes.
BrightScope: Some have critiqued the private retirement system in saying that it leaves out many smaller employers who don’t have the money, time or inclination to set up their own defined contribution plan.Â What do you think of this issue?Â What is the best way to solve it?
David Wray: Since the early 1980s, Congress has been concerned that retirement plans sponsored by private employers could disproportionately benefit the company’s management. Because of this, laws have been passed that over time have added a complex layer of tests and limits whose effects have been to reduce the benefits to company decision-makers and force an annual three percent of pay contribution for all eligibles in small company plans. For perspective, in 1983, the maximum individual defined contribution limit was $40,000, which was also the maximum individual 401(k) limit. The required discrimination tests were far simpler, and the top-heavy rules which require the 3 percent mandatory contributions had yet to be enacted. Because of the legislated changes since 1983, the personal benefit of these programs to decision-makers has been significantly reduced and the cost of compliance for plan sponsorship has enormously increased. Critically, those companies least able to make funding commitments, small employers, are required to make company contributions even if it would force the company into bankruptcy.
We need to roll back the rules for small employer plans so that there are greater personal incentives for small company owners to offer plans, change the rules so that small companies can band together into purchasing cooperatives and repeal the top-heavy rules that require the 3% mandatory contribution.
BrightScope: We know that you are actively involved in shaping policy-making in Washington DC. What are the two or three major issues that you feel are most important for your members?
David Wray: We need to keep employer flexibility at the center of the system. There are many suggestions for change, and most of them would reduce the employer’s ability to design a plan that best fits the company and its workers. The biggest push for change comes from those who would mandate contributions and plan designs.
For example, many want to mandate automatic enrollment. The use of employer decided opt-out solutions like automatic enrollment, automatic escalation and target date funds represent an important advance for employer sponsored defined contribution plans. They have brought thousands of new participants into the 401(k) system and enhanced the savings of many more. Many credit â€œinertiaâ€ for the success of these approaches and â€œinertiaâ€ is an important factor, but there is more going on than just â€œinertia.â€ â€œInertiaâ€ works when there is an alignment of a participantâ€™s interest with the decisions being made on his or her behalf. Every automatic enrollment program I know of is accompanied by an intensive explanation to employees about the benefits of being automatically enrolled.
It is a mistake to assume that participants will accept without question or objection anything that is put in an opt-out structure. Â I know this is true because we have a clear example. The default distribution option of a pension plan is an annuity. Participants who want to take a lump sum from a pension plan where a lump sum is available have to go through some effort to override the default. Overwhelmingly, they choose the lump sum, often in the face of significant educational efforts to discourage them from doing so. The rejection of the government mandated joint and survivor annuity solution could not be any clearer. In this case participants have determined they do not like the default, and â€œinertiaâ€ does not deter them.
BrightScope: We know that your government affairs group has thoroughly researched George Miller’s proposed bill, HR2989. What do you like and dislike about the fee disclosure section of HR.2989?
David Wray: Presently, it is the responsibility of plan sponsors to obtain fee-related information. Fee arrangements can be complex, and many plan sponsor decision-makers are not expert in understanding these arrangements. In many cases, plan sponsors don’t know what they don’t know and so do not get the information they need to make the best possible decisions. The legislation would require that service providers inform plan sponsors of the fees that the plan will be paying without being asked. This would significantly help plan sponsors with their fiduciary responsibilities.
We strongly oppose the mandate that every plan include an index fund. Congress must leave decisions about how plan assets are to be invested to plan fiduciaries.
BrightScope: Are your members concerned about the recent rise in ERISA litigation, specifically as it relates to fees in defined contribution plans?
David Wray: Initially, fee related lawsuits generated considerable plan sponsor concern. In response plan sponsors, especially at the larger companies, tightened their procedures. It has also become standard practice at larger companies to have fee-for-service consultants participate in the fee supervision process. Large companies were confronted with their need to know and consider the fees paid by the plan and plan participants, and they have taken action. Small companies have not been subject to fee lawsuits because the economic benefit, even if such a suit is won, is insufficient to interest plaintiffâ€™s attorneys.
It is ironic that the first wave of lawsuits resulted in such a strong reaction from plan sponsors that there are now few if any situations where it makes sense for a plaintiffâ€™s attorney to file a fee related lawsuit. Further, the lawsuits that were filed are being decided in favor of the defendant plan sponsors. Fee disclosure is important because it will benefit participants and plan sponsors not because we fear lawsuits.
Considering that there are over 600,000 private employer sponsored retirement plans, the system is relatively lawsuit free. The only area where lawsuits continue to be filed with regularity is where there is company stock in a plan and the stock price drops.
BrightScope: Do you have any suggestions for plan sponsors who are worried about changes in the regulatory environment and how it may impact them personally?
David Wray: Historically, whenever Congress has needed money legislators have reduced the amount that could be contributed on a tax advantaged basis to retirement plans. This started in 1983, and was consistent practice until 2001 when Congress reversed course and permitted greater contributions. The federal government again needs more revenue. I am concerned that Congress will reduce retirement plan contributions either next year or the following year. I’m especially concerned that the maximum limit for covered compensation, $245,000, and the maximum limit on defined contribution contributions, $49,000, will be reduced; or, that catch-up contributions will eliminated or made subject to discrimination testing.
Interview disclaimer: David Wray’s opinions are his own and do not necessarily reflect the opinions of BrightScope Inc.