Why are participants allowed (encouraged?) to remove their "retir

[Guest Ray Williams]

In all of the discussion about portability, lack of savings, etc. I have yet to see a good explaination of why Participants are allowed to remove their retirement plan funds, whether DC or DB, from retirement savings and spend it on whatever. The current 10% penalty is no real penalty when the choice is spending or not spending. Other than for a real hardship, ie, mortgage foreclosure, medical emergency, etc. it seems to me that a rational retirement policy would not allow Participants to spend their retirment funds until retirement.Having seen no real discussion of this issue, I do not know what the rationale is for the currrent system, if there is one. Any comments?

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[jlf]

SS gives the floor of protection you are alluding to, and rightfully so, because it is a social insurance program. The "rules of the game" change when you refer to employment based retirement programs. You apparently would do away with rollover distributions from qualified plans to IRAs and compel everyone to accept lifetime annuitization.

The accrued retirement benefit represents the employee's deferred compensation, therefore, the employee should have the unbridled right to choose the method (and tax consequences) of distribution.

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yes

[Guest Franklin Evans]

My perspective starts from being a young clerk in 1976, learning ERISA at about the same time all the veterans were struggling to understand and adjust to it.

The deferred compensation concept is key here. The funds (using DC for simplicity sake) are invested in the name of the participant by the trustees, and there are strict rules governing the participant's access to those funds. It's a delicate balancing act, with the tax wolves circling the high wire, waiting for someone to make a misstep.

Colorful metaphors aside, we neither "allow" nor dis"allow" the participants from "spending" their money. We try to make sure they understand the consequences of their actions, based on the regulations and each participant's specific circumstances.

In many cases, it's a matter of leading the horse to water, and watching the horse kick the trough over and lick the ground.

Did I say no more colorful metaphors?

I won't speak to a theoretical "rationale" for the whole mess. I'm much too cynical about it.

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[jlf]

Ray, you may want to take a look at: "DC v. DB, the arm wrestling continues". This topic is located on this message board. jlf

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yes

[This message has been edited by jlf (edited 05-04-2000).]

[Guest Ray Williams]

Jif- I pruposley have gfiven up on the DB vs Dc, since I see no discussion, but rather preaching. My questions is, if we clam to have a pension policy whose goal is to provide retirement income for people who have been employed in the US ecomomy, why do we make it so easy and painless for money to leave the retirement system. Wheteher the money comes from the Participant in a DC plan( realizing that employer contrtibtons are made in PS and MP plans) or strickly from employer contribtions in a DB plan is not rellevant to the issue of allowing funds that were created to provide retirement to be used for non-retirement purposes.

It seems to me that the greatest leakage is in the sector of the population that is of greatest concern, ie, those who are not employed for 20+ years by an employer who pasy for their retirement benefits. I keep hearing a lot of discussion of the need for " portability", whoever, it wold seem that portability that allows the funds to leave the retirement systems rather than remain in the system, whether in an IRA or an employer sponsored plan, is only making the situation worse rather than being a part of the solution.

We all know that as administrators, we would rather pay out Participants who are terminated from plans we administrate, rather than having to continue to cary them on our valutions, count them on 5500's and perhaps pay PBGC premiums on them. However, are we meeting are obligation to the Participants by encouring a method that is to their detrement, but our convience?

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[david rigby]

Ray makes some excellent points. My comments:

To a fairly significant degree, the national debate over "retirement policy" is being affected by the concerns of those who are the farthest away from retirement age, such as those under age 40. That does not make sense to me. "Portablity" is of greater concern to the younger set right now, but those monies are probably not viewed by them as earmarked for retirement. (Sure that is an oversimplification.)

Perhaps it is time to consider modifying the PBGC rules so that plan sponsors are not encouraged to hand out lump sums so freely. Perhaps plan sponsors should not have to pay a premium for vested terminated employees if the overall funded ratio of the plan is greater than X%, thus taking away a penalty for keeping the benefit in the "system".

[This message has been edited by pax (edited 05-05-2000).]

[jlf]

Ray, I assume you would never sign off on a letter with so many typos. Why don't you treat your e mail with the same standard?

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yes

[Guest Franklin Evans]

As moderator of this discussion board, I ask all contributors to refrain from personal commentary concerning the contributions to discussion topics.

Please use private e-mail for non-pension discussions. Please do not hesitate to contact me with any complaints about this discussion board, or Dave Baker for comments or complaints about this service.

Thank you.

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[MoJo]

Another interesting thread. Perhaps we confuse "portability" with "withdrawability." I agree, Ray, that the current trend of "more control for the beneficiaires" has created a tide of non-rolled-over withdrawals. Perhaps we need to separate "deferred compensation" from "retirement savings." I think they are one and the same (the sole reason for income deferral is future income - whether it be employee, employer, or a combination funded arrangement) - but alas, I am probably in the minority. Others perceive the benefit in tax deferral - although I learned long ago not to base significant financial decisions (solely) on tax issues.

[jlf]

You are right on target MoJo. Hopefully, the pension portability bill will become law very soon. It has the bi-partisan support of the major political players. I expect our current president or his successor will sign it into law this summer or next.

[MoJo]

I think you confuse my point, jlf. I don't agree with the precept behind the pension portability bill. I think it is the desire of employers to shed responsibility for former employees, soon to be codified in the pension portability bill, that encourages distributions and spending of defered comp (i.e. retirement income savings). Interestingly, Hewitt just came out with a study (reported on 401kwire this morning) that indicate 68% want taxable lump sum distributions, 6% would roll into another plan, and 26% would roll the money into an IRA. Scary statistics, considering most won't have sufficient assets to retire on, even if roll-overs were 100%....

I think in-service withdrawals (defined as a w/d prior to actual retirement (with some exceptions for documented hardships)) should be prohibited from qualified retirement plans. If we want/need a non-retirement deferred comp platform, then lets build one - but ONLY AFTER retirement income savings have been funded. I hate to be paternalistic - and that is not my intent - but it is only through government intervention of this sort that we can eliminate the need for tax supported systems (SSI, welfare, Medicare/Medicaid, etc.) and change the perception that these are entitlements, rather than safety nets.