Monday, March 2, 2015

Nice to see

This past August, I took a day to visit the national ACS meeting in San Francisco; I was badged as press, even! I sat in on a portion of the Sunday meeting of the Committee on Economic and Professional Affairs. I thought it was interesting to watch the committee members discuss and debate the ACS policy statement on retirement security. Here's a portion of the final statement:
...A concern is that small companies and businesses, such as chemical or high-tech start-ups, can be disproportionately disadvantaged in establishing such plans for their employees. Complex government regulations for these plans result in high administrative costs that need to be distributed over a small employee base, effectively increasing the costs for small business owners and employees versus larger companies. As a result, many small businesses choose not to offer 401(k)’s. For those that do, the administrative fees are high, and the investment options often limited, thus negatively impacting employee returns on investment. Considering that a significant fraction of the approximately 163,000 members of ACS are employed by small companies (less than 500 employees), this has a substantial impact on our membership. 
Another detrimental component in many 401(k)’s is lengthy vesting periods. According to the 2010 Bureau of Labor Statistics National Survey, 69 percent of 401(k) plans accrue on either ‘cliff’ or ‘graded’ vesting schedules. ‘Cliff’ schedules require employees to remain with an employer for a minimum number of years or they receive no match, and ‘graded’ schedules are plans that slowly increase the employee’s vested portion with years of service. Unlike corporate careers of the past, current careers in the physical sciences are now characterized by multiple shorter-term professional positions. Therefore a professional in the chemical enterprise can be negatively affected by slow vesting 401(k)’s resulting in lack of portability. 
Specifically, in the area of retirement plans and 401(k)’s, Congress needs to take action to
  • Reduce the regulatory complexity of 401(k) plans available to small business owners in order to make them more economically efficient and effective.
  • Enact policies that promote the development of faster vesting and more portable 401(k) programs....
I gotta say, as a statement of desired policy, I agree with most of it. I have worked for an employer who claimed that 401(k) complexity and cost was too high (and of course, they would have never have gone for a match.) But the pre-tax nature of 401(k)s is pretty great, in my opinion.

(I wonder if Vanguard has a small-company 401(k) option? I am going to guess the answer is 'no.')

Glad to see that CEPA (among other ACS committee) has put together a statement -- good stuff. 


  1. I dunno. It seems to me that tying critical long-term benefits (retirement saving, healthcare insurance) to the inherently volatile job market was a mistake. In 1978 when the Sections 125 and 401(k) were added to the tax code the unraveling of job security was pretty obvious even and should have been obvious to Carter.
    The "before tax" idea is somewhat wishful thinking, too. The cost of all social plans is carried by all of us. We don't see the immediate tax bill only to either pay these costs from other (higher) taxes or dump them on our kids via creative accounting.
    We have tried that with CO2 emissions. All loans come due some time. With interest and penalties, too.

    1. I don't think anyone expected retirement to go the direction it did. The man who invented the 401(k) says he never intended it to be a replacement to pensions. (Ted Benna is his name.)

      Regardless, it is what it is.

    2. Well, this is nice to know. Sort of. One-sided wishful thinking should be somewhat limited in social policy makers. Benna said several times that he was unhappy with the business run pensions for their employees, so he invented something that added another business interest to the mix. My observation is that adding social causes to a money making enterprise is a bad idea.

      A corporation has one overriding motivation, which is to make money. Everything else is secondary and mixing in other functions usually worsens business performance. There is nothing wrong with making money and I see this as a basic human right. The problem is that the society wants more/different and the business structure is conveniently there to be used (or, abused).

      In addition to making money, people want some long-term security (savings, health care) and these can be profitable only for businesses servicing (“milking”) these areas. For all other businesses participation in benefit plans is just a loss as long as the job market is not very tight.

      There is also the time frame issue. While paying for some healthcare plans can make a business sense (keeping employees focused, healthy, and more productive) the contributions to retirement savings are just pure expense with little to no return. Have you heard from a colleague who wants to change jobs as soon as the 401k vests?

      This is a fundamental conflict of interest. This also means that the employee will never be free to make reasonable and unbiased decisions to grow the retirement fund. On the other hand this guarantees that the employer will always be looking for ways to cut its contributions. Additionally, both sides operate in the near-monopoly market for financial services.

      Now, maybe I am naive, but I hope that the author of the next idea for benefits will look at the motivation of all sides, not just give in to populist ideas of the moment. Simplicity of purpose is beautiful.