WASHINGTON-The Pension Pro- tection Act (PPA) reflects a change not in the investment industry, but in the very fabric of the American workforce, said Vanguard Chief Executive and Chairman John J. Brennan.
"When we look back from the future, I believe we will look at last August's law as important as ERISA [the Employee Retirement Income Security Act]," Brennan told a lunch-hour crowd during the Investment Company Institute's Pension Protection Act Developments Conference here last Wednesday. Roughly 160 people registered for the event.
"The PPA and ERISA are bookends to our era," Brennan said. Of the PPA, he added, "I am a big fan."
And it's not just because his Malvern, Pa.-based shop, the second largest mutual fund complex in the country, stands to gain from the 401(k)-boom to which PPA provisions will likely set up.
"The PPA shores up [defined benefit] plans of the past, codifies the present state of best practices in [defined contribution] plans, and more importantly, it sets a good path for how we move forward in the future," he said.
While politicos and pontificators may suggest that the law's focus on defined contribution (DC) plans-and tacit acknowledgement that the age of the DB plan is over-was driven by the advent of the 401(k) and financial services companies' corresponding innovations, Brennan counters that the American workforce, not the investment management industry, is the true driving force.
"The U.S. retirement system is responsive to what goes on in the employee-employer relationship," Brennan said. And that relationship has fundamentally changed over the past 30 years, as the American economy has become increasingly service-sector oriented.
"In my mind, that's a stark reality," Brennan said.
In the three decades since the passage of ERISA, American workers have gone from lifers at large industrial companies, to employees of large, fast-growing service companies like Microsoft, Yahoo! and even Vanguard.
Rather than offer this more-mobile workforce defined benefit plans, these new-economy companies elected instead to provide easier-to-administer 401(k) plans, which employees could take with them as they job-hopped, he said.
"No one wants to tie you to your employer for 20 or 30 years so that you can get benefits when you are 55 or 65," he said.
For employees, the 401(k) option became increasingly attractive as workers grew to be more mobile, and less likely to stay with any company long enough to accrue meaningful retirement benefits. In fact, the average DB benefit is only about $6,800, Brennan noted.
The idea of becoming one's own "investment manager" means no more worrying about whether the company where one had invested his or her first 20 working years would go belly-up before employees could realize those benefits, Brennan said.
Another influence in the increased popularity of defined contribution plans has been a shift in corporate ethos.
"No one looking forward at the time [of ERISA] could see what would happen in corporate America, where bankruptcy would become a business strategy, and the [Pension Benefits Guarantee Corporation] would become a business strategy," he said.
Suddenly the oh-so-secure defined benefit plans seemed somewhat scary for workers.
With time, the ratio of DB to DC plans flipped, with 80% of today's retirement programs being DC plans with far more options for investors than their predecessors.
"The market has spoken, and it's a DC marketplace," he said.
"DC plans, to be sure, have their risks," Brennan continued. But unlike retirement plans of the past, those risks lie with the employee-participant, not the employer-sponsor. Primary among them are the risk of not participating, the risk of contributing too little and the risk of selecting inappropriate, non-diversified or overly conservative investments.
The past quarter-century has shown that too many workers fall prey to those risks, so the PPA includes provisions that help even reluctant savers from falling into those traps.
"Its strength is that it codifies present best practices," Brennan said.
Fund companies devised features such as automatic enrollment and products such as balanced, target-risk and target-date funds, and have been using them. With the PPA, Congress has offered public-sector support of these tools.
"The PPA allows plans to have both the engaged investor and the reluctant saver, and to serve them both well," he said.
Implementing these private-sector innovations in public policy shows that lawmakers have studied the problems with ERISA and threats to Americans' retirement security, and have taken steps to correct it for the future, Brennan said.
"The PPA is and will remain the cornerstone of private sector retirement of the future-plain and simple," he said.
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