I was inteviewed by Benjamin Guggenheim for this Politico article. Nothing I said made it into the piece. This is what I emailed to the author on November 15, 2023 which explains the real problem with the current state of private pensions and it does not have to do with more money in the system (which is a good thing) or lobbyists making laws (which is not exactly breaking news).
Ben,
I would be glad to discuss these issues with you any time. As it turns out the next month or so are one of the slowest times of year in my job of doing 5500 forms for small plans so I have plenty of time.
The blog piece you picked is a seminal one as the concept of cross-testing has been extended to Defined Benefit systems through Cash Balance Plans where you can get much bigger contributions than under the Profit Sharing 401(k) model which have annual limits linked to annual salary. Cash Balance plans can have much higher contributions for older / higher paid participants while giving younger lower-paid participants token contributions. The testing that these contributions are non-discriminatory is also so complicated that few understand it and is underpinned by the concept that giving a 25 year old $1,000 is equivalent to giving them $26,000 at retirement age 65 (8.5% interest adjusted for 40 years) while a 60-year-old would need to get $17,000 to have $26,000 in 5 years at retirement age 65. This passes for equity these days. And that assumes they make the same salary. If the 60-year-old is the boss the relative difference in their salaries multiplies that difference. This is cross-testing and it can be so obviously unfair that in 2001 they had to introduce the concept of a minimum gateway allocation where the lower paid non-owners (called Non-Highly-Compensated-Employees- NHCEs) need to get at least 5% of pay if only one plan to be able to use cross testing. For a combo DB/DC plan that gateway goes up to 7.5% of pay.
The thinking within the actuarial community is what do you care if the bosses and owners are getting $250,000 as their contribution on account of them being much older and higher paid when the rank-and-file get their 7.5% of pay which they would not get if the plan had never been set up. That’s how those who get big fees from setting up and administering these plans rationalize it.
I have been around for a while – starting in the business in 1979 and becoming an Enrolled Actuary in 1987 so I have seen worse abuses early on. Before top-heavy minimums came in we sometimes had plans where only the principals got any benefits while the other younger, lower-paid participants got nothing since the assumption was that they would benefit so much more from Social Security than the higher-paid people that they wouldn’t need this pension.
The blog you referenced was from when I was blogging at nj.com which is the website of New Jersey’s largest newspaper, the Star Ledger. They have since gotten rid of these citizen bloggers and I was kicked off a little before they closed down shop for outside bloggers. That was when I started my own blog – www.burypensions.wordpress.com – where I go into some of the same issues. Lately, for a number of reasons, I have not been blogging much on my blog but now that I have settled in Connecticut I may be more active.
John
Burypensions Blog 