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WHY SHOULDN'T EMPLOYERS be able to directly link their 401(k) and defined benefit plans?
Allowing a new type of pension plan is just one of several ideas that federal pension officials have received from benefit consultants as a way to stop further erosion of and ultimately revitalize the nation's defined benefit plan system.
Certainly, new, bold ideas are needed to shore up a system that by any measure is badly sagging. New defined benefit plan creation has just about dried up, and employers, especially smaller companies, are terminating existing defined benefit plans at a roughly 3,000 to 4,000 a year clip.
Some might say this decline doesn't much matter. After all, many defined benefit plans have been replaced by 401(k) retirement savings plans, and account balances in those plans have been soaring.
But what does the future hold? Inevitably, the stock market will take a tumble, and for workers near retirement whose entire nest eggs were in that basket, especially those who overinvested their accounts in equities, retirement savings could be inadequate.
To be sure, 401(k) plans have been and will continue to be a wonderful savings plan vehicle. But we don't think they ever were intended to be employees' primary source of retirement income.
However, they have become just that for millions of employees as employers have grown disgusted with increasingly complex and burdensome defined benefit plan regulations and have terminated their plans. Federal lawmakers and regulators in effect have smothered defined benefit plans with a mountain of red tape.
Still, it isn't too late, as PBGC Executive Director David Strauss says, to arrest the decline of defined benefit plans. And as the only savings plan that can provide a secure, guaranteed retirement benefit to employees, the effort to stop that decline is a worthwhile one.
If defined benefit plans are to regain favor, however, lawmakers and regulators have to be willing to consider dramatic reforms that would permit more fluid and flexible plan design and administration.
Obvious steps can be taken to stop the erosion of interest in defined benefit plans, including modifying or eliminating rules that needlessly add to employers' administrative burdens. Pension reforms enacted in recent years, as well as proposals that a group of senators currently is crafting (BI, July 13), are steps in this direction.
There are less obvious but perhaps even more important measures that can be taken.
The appeal to employees of 401(k) plans with their account balance features and the more rapid attainment of significant benefits is understandable.
Why, therefore, can't pension law be amended to allow a new type of flexible retirement plan that contains the best features of both types of plans? Such a plan would offer the secure, guaranteed benefit that is the hallmark of a defined benefit plan while adopting 401(k)-type features to allow younger employees to immediately accrue benefits.
No doubt there could be a myriad of ways to integrate the two types of plans that would appeal to a broad cross-section of employees, while perhaps cutting employers' costs.
To us, this is an idea well worth further consideration.