Episode 3: Retirement Plans Then and Now – Plan Design & Investments
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Welcome to Revamping Retirement, a podcast brought to you by Comac Retirement Group, where we tackle the retirement plan related issues plaguing fiduciaries and plan sponsors. Our host, Mike Webb, has more than 25 years of experience in the retirement plan industry and is a nationally recognized subject matter expert. We hope you enjoy Revamping Retirement.
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Thanks, Kara. Kara McCauley, our producer with the wonderful introduction as always, welcome everyone out there in podcast land. So glad you could join us for what promises to be another exciting episode, episode three, for those of you keeping score at home, of the revamping retirement podcast. My name, as Kara said, is Mike Webb, and my goal for the next 10 minutes or so, we keep these to a short length.
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is to talk about a retirement plan issue without putting you to sleep. Yay! What an ambitious goal we have here at the Revamping Retirement Podcast. But we really want to try to make things fun for you. And in the interest of that fun, we’re going to take a little another trip this week on the Wayback Machine. You may recall the Wayback Machine from the last podcast where I go way, back to when I started working for Comac Retirement. I know that was a long time ago. And we talk about the differences in retirement plans between then and now. And some of you
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didn’t listen to last month’s podcast, maybe scratching their heads and saying, why would I want to know what retirement plans were like in the 1950s? No, okay, I’m not that old. I did not start working and come back to retirement group in the 1950s. I was in 1990s, December of 1991 to be precise, and we could still learn a lot of lessons from the differences between retirement plans in 1991 and today. I think that was evident in the last podcast where we talked about technology.
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This time we’re going to focus on plan design and investments, and I promise I will keep it fun. And in the interest of that fun, what has become a tradition on our revamping retirement podcast, and I know you just can’t wait for it, so we’ll get right to it, this month’s retirement plan trivia question, and our trivia question is related to our topic at hand, defined benefit plans. There was a choice of core design between defined benefit and defined contribution.
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were much more popular back in 1991 than they are today. That probably comes as a surprise to zero listening to this podcast. Back in 1991, as measured by the Bureau of Labor Statistics National Compensation Survey benefits, 35 % of private sector workers, and most public sector workers, but the trivia question is private sector workers, 35 % of private sector workers had access to a defined benefit plan. What is that percentage today?
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We will have that answer at the end of our podcast. And I’m sure you’re waiting with bated breath, but for now we’re gonna get into our topic at hand. The changes between 1991 and today in 27 years for plan design and investments. Plan design, we were just getting through the Tax Reform Act of 1986, which became effective in 1988 and was generally not understood by everyone until many years later. In 1991, we…
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still struggling with it 401k plans and 403(b) plans were incredibly complex. There were just a lot of ridiculously complicated provisions and I’ll give you an example of 403b plans if an employee came up to me and said hey Mike how much can I put in a retirement plan I would say can I get back to you in a day or two and they would go well why why can’t you just tell me the number isn’t there a number and I would tell them no there’s not a number because we have according to the law have to do this thing called the exclusion allowance or maximum exclusion allowance calculation or I…
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take a lot of data from you, fill out a series of papers, and magically figure out how much you can put in your time plan and the calculation is unique to you. And of course, the response from most participants that was, well, you know what, maybe I’ll reconsider participating in this 403(b) thing. You couldn’t even tell people how much they could put in without going through a bunch of hoops was terrible. And that complexity was not limited to 403D plans.
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401k plans had their own problems as well. They had a deal with a 5500 that was pretty much impossible to complete accurately and most people didn’t. 403(b) plans, fortunately back then only had to do their ERISA 403(b) plans only had to report their name, address, and phone number basically on a 5500, but 401k plans, was an absolute nightmare. Also a nightmare was simply trying to figure out if you were a for-profit employer, how much you could deduct of your employer contributions to the plan for taxes. Because as you’re aware, for-profit
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plan sponsors, when they sponsor a medical plan or a retirement plan, get a deduction for their contributions. You couldn’t figure out how much the deduction was because the formula was incredibly complicated and employers were often screwed up and have to correct it. It used bizarre definitions of compensations. It was just terrible. Fortunately, that has all changed today. A lot of that complexity through pension simplification has gone away.
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that’s a good thing because plan sponsors used to spend actually spend money on specialists whose job was to make it make certain complicated aspects of the law easier for them. That’s how bad things were. In fact there was a there was a guy who made millions and I’m not exaggerating because he came up with a calculation software for the MEA or maximum exclusion allowance calculation for 403(b) plans and he was the only game in town he could charge whatever he wanted to plan sponsors and and like I said probably made millions.
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Well, he’s probably, I’m hoping he’s retired in sunny Florida now because his industry through pension reform dried up overnight. There is no MEA anymore. A lot of the other complexities are long gone from retirement plans and that’s a good thing. Another thing that’s changed in retirement plan design is in relation to our trivia question, DB plans were as popular, if not more popular than DC plans back in December of 1991. Not anymore.
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401k plans and 403(b) plans, which back then in 1991 when I entered the 401k, 403b industry, they were an afterthought. They were a supplemental plan at best in a lot of situations. And I know I went to an industry that was an afterthought. That’s a great career move on my part. But 27 years later, I’m still kicking, still working for the same firm, so I must have done something right. But nowadays, as you know, 401k, 403(b) plans are the primary type of retirement plan, at least for private sector workers.
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and that and again uh plan sponsors can treat them accordingly. Back then, because they didn’t care as much these plans weren’t to be honest very good and speaking of not very good investments oh my goodness in 1991 there was this for some reason we must have all had a brain freeze or something but we all used to think that oh we’ll just we love participants and the way we express our love to them
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is we’ll provide as many investments as is humanly possible. We’ll have plans with hundreds of investments. Oh no, make that thousands of investments! Because we want them to have the choice. We want them to be free to choose whatever they want. It will be wonderful. It was not wonderful. Participants didn’t participate in the plans because they didn’t want choice. Too many investments meant too much confusion. And…
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Participants wouldn’t choose at all. They would just say, okay, I’m not going to participate in the 4R3B or 401K plan for now. It was a disaster. And I don’t know why we ever thought of that way back in 1991 when I first started working. But fortunately, we changed our minds on that really quickly and plan sponsors and advisors kind of united to reduce investments. And today, the average number of investments I believe is 21. Most plans have 15 to 20 investments that could be best in class.
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The days of plans having a hundred, even hundreds of investments, never mind thousands, are becoming more more rare and that is a good thing. Even investment types back in 1991, oh my goodness, I mean to quote a phrase from the great American classic movie Caddyshack, you’ll get nothing and like it. Well for 403(b) and most small- to mid-sized 401(k) plan sponsors it was you’ll get annuities and like it.
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And not only you’ll get annuities and like it, you’ll get, if you’re with XYZ Record Keeper, you’ll get XYZ’s proprietary annuity products and like it. You couldn’t go to an outside entity to get investments. You were a slave to that particular record keeper’s proprietary investment fund lineup. Thankfully, that’s all changed. only do you have our mutual funds have replaced annuities as the dominant form of investment in retirement plans, you now have access to
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Outside mutual funds—modern open architecture gives you any mutual fund you want in most record-keeping platforms, and that has been a good thing. Target date funds, interesting. Managed accounts, self-directed brokerage accounts. If I brought any of those terms up in 1991, you would have looked at me like I had two heads, because in retirement plans, those things essentially did not exist. Well, all those things are prevalent today.
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think about how things have changed. Boy, the target date funds went from being nothing in 1991 to the dominant form of investment in retirement plans today. So that is a huge, huge change. So a lot of things have changed. What has stayed the same? Unfortunately, there’s still a rather large share of annuities in 403(b) plans. We talked about the changes there, but a lot of that has to do with legacy. A lot of these plans tend to be employee
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rather than employer control with respect to investments. So employers can’t just pack up an existing investment and move it. The participants have to move existing assets. So while 403Bs like 401K’s contributions are dominated by mutual funds, there’s still a lot of legacy annuity assets. So that hasn’t changed much since 1991. It’s gone down a little bit, but not as much as much of us would like, where low cost annuities are not present. We’d really like to see that share go down.
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The other thing that hasn’t changed a lot are the difference between the 401k and 403b plans. Still boggles my mind that 403(b) plans and 401(k) plans are still so different. There’s been lot of differences like the MEA, Exclusion Alliance have been eliminated, but there’s still a long, long way to go. A lot of differences between 403b’s and 401k’s simply leave one scratching their head or pulling their hair out depending on their perspective. So what can plan sponsors learn from all this stuff? Well, I think the first thing is investment.
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If you have over 50 investments in your plan, even over 20 investments, you seriously need to rethink that. The trend has been, the number of investments has gone down every year. And for good reason, participants don’t want more investments. They want as few investments as possible so it makes it easy to make decisions. Most of them participate in target date funds anyway, where they’re not even making a decision. So that’s one thing. And I think you need to be forward thinking about your invest, always be forward-thinking about emerging investment types in your plan.
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Target date funds didn’t exist in 1991. There’s gonna be something in 27 years from now that didn’t exist today. So you need to think about things like common collective trusts. I’m sorry, it’s collective investment trusts or CITs. Separately managed accounts, even ETFs, even white labeling funds. You need to think about those things to be very forward thinking about your investments. We’re just about out of time. So I’m gonna get to the answer to trivia question.
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The percentage of private sector workers with access to a defined benefit plan in 2018, that’s the date of the latest Bureau of Labor Statistics survey, is 17%. It’s gone all the way down from 35 to 17. The Central DC plans, by the way, has gone from 34 % to 64%. So big change in a very short period of time. We are out of time for Karen McCauley, our entire production team. This has been Mike Webb.
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And this has been Revamping Retirement.
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The content in this podcast is for institutional investors and plan sponsors. The information is intended to be educational and is not tailored to the investment needs of any specific investor. All examples of investor gains and losses are hypothetical and intended to illustrate the importance of early saving and consistent retirement contributions over time. Investment decisions should be based on an individual’s own goals, time horizon, and risk tolerance. Nothing in this content should be considered as legal or tax advice, and listeners are encouraged to consult their own lawyer.
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accountant or other advisor before making any financial decision. Thank you for listening to Revamping Retirement.