DON'T RUSH 401(K) PLAN REFORMPosted On: Jul. 13, 1997 12:00 AM CST
LAWMAKERS SHOULD STUDY the lessons of the past before continuing with what we regard as potentially harmful tinkering with retirement laws.
Thirteen years ago, Congress-after numerous hearings and compelling evidence-addressed a real problem in the defined benefit pension area: spouses, especially widows, left without a pension benefit after the other spouse died.
As numerous witnesses told congressional panels during the early 1980s, an employee could work for decades and earn a generous pension benefit. But employees-perhaps to save a little money-sometimes failed to opt for a joint and survivor benefit that would have provided a surviving spouse with about half the worker's promised benefit. As a result, the surviving spouse would get nothing.
The financial results of this situation could be devastating, especially in cases where a surviving spouse never worked and had no pension benefit of his or her own.
Congress fixed that problem in 1984 when it passed the Retirement Equity Act. That law requires a defined benefit participant to select a joint and survivor benefit unless the spouse waives his or her right to receive it. The REA then was and still is a good solution to a real problem.
Contrast the deliberative process that led to the REA law with what Sen. Carol Moseley-Braun now is doing.
She has proposed, and the Senate Finance Committee and the Senate has accepted, an amendment to a sprawling tax bill that would bar loans, hardship withdrawals or lump-sum distributions from a participant's 401(k) plan account without his or her spouse's written approval. Without such approval, distributions would have to be paid as an annuity.
Backers of the amendment paint it as pro-woman. They say numerous wives have been victims when their spouses have taken big chunks of money out of a 401(k) plan, leaving the wife with little in case of death.
Perhaps so. But anecdotal evidence and horror stories never should be the foundation of legislation. Unlike the REA, which was developed and enacted amid overwhelming evidence of the need to change the law, such a record does not exist to justify the proposed 401(k) plan distribution rules. Indeed, the Senate passed the amendment without any substantive discussion.
Should the 401(k) distribution rules be changed? Perhaps. But first, let's investigate whether there is a need for such broad restrictions.
In examining whether the distribution rules should be changed, legislators should first take note of demographic changes in the workforce. Women today are much more likely to be working and be covered by their own 401(k) plans than they were in the 1980s. As a result, if spousal consent is required on 401(k) plan distributions, women could be hurt as much as they could be helped.
We can think of situations if such a rule were in effect where a working woman who needs money from her 401(k) plan to pay for a down payment on a house might be blocked by an estranged husband unwilling to sign the necessary approval.
Legislators also should keep in mind that rules already are in place to protect 401(k) plans from being drained. Tough federal rules restrict pre-retirement distributions to only a handful of hardship situations. Similarly, the size of loans that can be taken from a 401(k) plan also already is limited under the law.
The issue of spousal consent on 401(k) plan distributions is, we agree, an important one. But slapping an amendment onto a tax bill-with no debate or investigation-is no way to deal with an issue affecting the nation's 401(k) plan participants.