Tom Sgouros: Short Takes

Tom Sgouros: Short Takes

Dictionaries

A curious thing happens when I look in my dictionary under the word "pension." There I find a definition that says a pension is a series of payments. It's curious because lately you hear so much about the difference between a "defined benefit" pension and a "defined contribution" pension. The fact is that only one of these things satisfies the actual definition of a pension. The other? Well, until quite recently, no one would have called a 401k anything but a savings account. Calling something like that a defined contribution "pension" plan is little more than a word heist, a verbal cheat probably devised in the 1980s by some unsung HR executive to deceive employees at his company into thinking they were getting something they were not.

For the past 30 years, abetted by this linguistic deceit, companies across the country have moved employees in the private sector from traditional pension plans to 401k plans. We've learned a lot over those decades, and one of the things we've learned is that it's a great way to create lots of elderly poor people. But there are also some details we've learned that are worth keeping in mind as we enter the final phase of this year's pension reform debate.

For example, we've learned from that experience that employees with 401k accounts have been subject to high levels of commissions and fees. Commissions and fees in the investment world are assessed on the flows of money. A hundred different investment account owners will make 100 different decisions about what to do with their money, which means a big pot of money, managed as 100 little accounts will produce higher fees for the money managers than the same amount of money managed as a single big pool. Is it any surprise that the conversion to 401k plans has been a bonanza for money managers?

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Worse, the closer people get to retirement, the more risk-averse they get. This isn't a bad thing, really, but it can be taken too far, and the data we have clearly shows that most people do. Returns on individually-managed accounts tend to plunge as people get into their late 50s and 60s. I continue to think it unnecessary to convert our state's pension system to the hybrid system proposed by the Treasurer and Governor, but if we must, there are some common-sense protections that ought to be built in.

Manage as a pool

For one thing, the pool of money in the "defined contribution" plan should be managed as a single pool, as is done by similar plans in Washington, Oregon, and Nebraska. This will maximize the chance of individuals getting decent returns on their funds all the way up to retirement and minimize the drain on the fund represented by the plan administration fees, sales charges, management fees, recordkeeping fees, and individual service fees for investment counseling inflicted by so many other 401k plans out there. I've learned that Representative Jay O'Grady (D-Lincoln) is working to get an amendment to the pension bill to do exactly that and hope that it gets wide support.

Avoid criminals

The bigger picture behind the debate over pensions is that we live in a world where large financial corporations not only force us to suffer through the consequences of their bad business decisions, but many of them break our laws with impunity. It boggles the mind that neither the depredations of Countrywide Mortgage (now part of Bank of America) nor the actions of Goldman Sachs in the Abacus deal or Deutsche Bank in the Gemstone mortgages, have produced even any criminal prosecutions, let alone convictions. Angelo Mozilo, then CEO of Countrywide, did have to pay a $22.5 million penalty and gave up $45 million of his gains to settle SEC charges. He had, of course, earned $129 million the year before, so I'm not certain how that counts as an example to others.

It's important to establish that these abuses and the relatively small fines that result cannot simply be a cost of doing business for financial companies, and here is a way to begin doing exactly that. The State of Rhode Island does a lot of business with banks and other financial corporations. We must establish the principle that we should not do business with firms who do not deal honestly with their customers. It's not only common sense -- after all we are among those customers -- it's good policy. We can begin by requiring that the manager of the defined-contribution funds not have a history of such abuses, and the pension bill is an ideal place to begin.

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].

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