“The Economic Impact and Financial Trends of Pensions and Retirement Plans” National Press Foundation October 17, 2000 James A. Klein President American Benefits Council

–Advocacy Organization –Plans Covering 100+ million Americans –Formerly Association of Private Pension and Welfare Plans –“Benefits of Brevity”

Why is This Important? Demography is Destiny million Americans over age million Americans over age 65 Population Projections Program, U.S. Census Bureau Typical 45 year old has 40% of savings needed to avoid a decline in standard of living. Merrill Lynch 45 year old without savings wanting to replace half of income, will need to save 22% of income for 20 years. Committee for Economic Development

Why Is This Important? Importance of Employer-Sponsored Benefits to Competitive Success of American Business Today 76% “very important” 10 years ago 36% “very important” Harris Interactive September 2000

U.S. Retirement System “3-legged stool” –Social Security –Personal Savings –Employer-Sponsored Plans 4th leg: Earnings

A (Very!) Brief History of Pensions and Retirement Plans –American Express 1875 –Late 1800’s/Early 1900’s - Railroad Industry –WWII - Wage Controls – Employee Retirement Income Security Act (ERISA) – First 401(k) plan – Proposal to Abolish 401(k) Plans

Types of Plans –Defined Benefit (DB) Plans (e.g. traditional pensions) Benefit received is prescribed Employer-funded Guaranteed by PBGC Not very portable –Defined Contribution (DC) Plans (e.g. 401(k), 403(b), etc.) Contribution is prescribed Employer and Employee funded Investment gain/loss Very Portable –Hybrid Plans (e.g. cash balance)

Legal Structure –Labor Law and Tax Law –Federal Preemption –Bifurcated Enforcement U.S. Department of Labor U.S. Department of Treasury –Bifurcated Oversight Senate HELP Committee House Education & Workforce Committee Senate Finance Committee House Ways & Means Committee

Key Statistics –700,000 Private Retirement Plans 60,000 DB Plans 640,000 DC Plans –$4.4 Trillion in System in 1999 ($260 billion in 1975) –Shift in Plan Coverage 87% covered workers in DB plans (1975) 50% covered workers in DB plans (1996) 80% covered workers are in DC plans (1996) –Only About 50% of Private Workforce is Covered by a Retirement Plan

Economic Role of Pensions –Hold About 20% of Equities –Hold About 17% of Corporate Bonds –Largest Tax Expenditure: $72.4 Billion Plus $14.6 billion for IRAs & Keogh plans But it is different Will this change?

Economic Role of Pensions –$1.00 Tax Expenditure Investment = $4.60 Benefit Return –During Period of Deficits, Pension Savings Offset “Dissavings” –Shift to DC Plans = More Investment Decisions Made by Individuals –Continued In-flow Until Baby Boomers Retire

Issues –Complexity –Investment Education and Advice –Who is Hurt/Helped? –Then: Revenue Now: Fiduciary Responsibility

Who has “A Lot” of Influence on Congress on Retirement Policy Media - 62% Retirees/Seniors Groups - 51% Employees - 40% Plaintiff’s Lawyers - 23% Employers - 21% Financial Institutions - 11% Policy Think Tanks/Academics - 9% Harris Interactive September 2000

Accuracy/Fairness of Media Coverage Accuracy Very Accurate 1% Somewhat Accurate 43% Not Very Accurate 46% Not At All Accurate 10% Fairness Very Fair 1% Somewhat Fair 38% Not Very Fair 51% Not At All Fair 11% Harris Interactive September 2000

Stories Yet to Be Written –Implications of Social Security Reform on Private Retirement Plans –Linkage of “Retirement” and “Health” Policy –Pensions as Source of Investment Capital –Cash Balance Plans - Last Best Hope for DB Plans? –Phased Retirement

Five Questions to Ask When Preparing A Benefits Story 1. Is the development or change specific to a single company, or is it a trend in the industry, sector, or size of company? 2. What does the employer say about the development or change? 3. Ask a company executive: How does this change affect you as an employee? 4. Is this an accrued benefit or is it a future benefit? 5. What other reasons besides cost savings would prompt this action?

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