The perils of do-it-yourself pension plans

Business has been pressing Congress to ease the burden by changing the law governing how pension plans calculate their obligations. Instead of reckoning the future return of their assets on the basis of the 30-year Treasury bond rate, companies would be allowed to use the higher rate of long-term corporate bonds.

David Certner, director of federal affairs for AARP, an organization with millions of older people as members, doesn't mind such a change if it is confined to calculating needed contributions to a pension plan. But he terms the change "outrageous" if used to reckon the value of lump-sum pension payments to workers leaving a firm. That's because a 2 percentage point increase shrinks a $100,000 lump sum by $25,000.

The interest-rate change is part of a much broader pension bill proposed by Reps. Rob Portman (R) of Ohio and Ben Cardin (D) of Maryland. Other provisions would cost $100 billion over 10 years in lost federal revenues. It has been taken back for revisions to reduce the cost. A revised bill could pass the House this summer, Mr. Certner says.

To shrink pension costs in this economic slowdown, some companies have suspended their matching contributions to their employees' 401(k) plans. A forthcoming study by Ms. Munnell's think tank lists 15 big firms doing so.

That will diminish the assets available upon retirement and discourage some employees from participating in the plans. As it is, 401(k)-type plans are already much riskier for employees. Employees must choose whether to participate, where and how much to invest, how to reallocate the funds into more stable investments as they age, what to do with the funds in a plan should they change jobs, and how to allocate the funds when they retire.

Munnell says many, if not most, individuals are making mistakes. Some 25 percent of employees on average don't join the plans. Only 10 percent set aside in their 401(k) plan the maximum amount allowed under the law. Many invest too much in their own firm's stock or do not diversify their investments in other ways. Relatively few rebalance their portfolios to include more conservative investments in more senior years.

Just as everyone need not learn carpentry to build their own homes, not everyone should have to learn investing to manage their own retirement plans, Munnel argues. She would like the law changed so companies could automatically carry out key investment decisions for employees - unless they opt out of any of these decisions at any time. For instance, new employees would be automatically enrolled in a 401(k) plan at a level to take full advantage of the employer's matching contribution.

"People should take a close look at what they have" in the way of retirement money, says Christian Heller, a retirement specialist at the Economic Policy Institute in Washington. "If all these trends are combined, it doesn't look good for current workers." A third of working households, he calculates, will have inadequate pension funds for a basic standard of living on retirement.

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