Retirement Revolution: Unmitigated Risks in the Defined Contribution Society
76 Pages Posted: 4 Mar 2013 Last revised: 3 Dec 2013
Date Written: September 22, 2013
A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (a defined benefit plan) to self-directed accounts like the 401(k) (a defined contribution plan) and has drastically changed how people invest in the stock market and why. The prevalence of self-directed, defined contribution plans has created our defined contribution society and a new class of investors — the citizen shareholders — who enter private securities market through self-directed retirement plans, invest for long-term savings goals and are predominantly indirect shareholders. With 90 million Americans invested in mutual funds, and nearly 75 million who do so through defined contribution plans, citizen shareholders are the fastest growing group of investors. Yet, citizen shareholders have the least protections despite conventional wisdom that corporate law and ERISA protections safeguard both these investors and their investments. As explained in an earlier paper, citizen shareholders do not fit neatly within the traditional corporate law framework because their investment within a defined contribution plan restricts choice and their indirect ownership status dilutes their information and voting rights, as well as exacerbates their rational apathy as diffuse and disempowered “owners.”
Additionally, the retirement revolution from pensions to 401(k)s has changed not only how individuals prepare for retirement, but also who bears certain risks that affect the retirement nest egg. Under self-directed defined contribution plans, but not defined benefit plans, citizen shareholders bear the risks of poor market performance, longevity, and information asymmetries, as well as plan administrative costs and the life-long responsibility of asset management. Research indicates that citizen shareholders, particularly those who are women, minorities and those with lower-education levels, do not have the financial literacy to undertake these tasks in a way to maximize both individual and society-wide retirement savings. These changes, and their consequences, are firmly established in our defined contribution society and are a result of the retirement revolution. Yet, these changes are not widely understood by individuals saving for retirement, nor have they been incorporated into how we think and talk about shareholders in and outside of the academy. In this Article, I build on previous work, which articulated the citizen shareholder status and its incompatibility with traditional corporate law by identifying and explaining the second prong — that citizen shareholders have substantially weakened protections under ERISA and bear substantially increased risks and responsibility in our defined contribution society.
Keywords: ERISA, 401(k), defined benefit, defined contribution, citizen shareholder, financial literacy, saving, securities, savings, mutual funds, investment, investors, individual investors, retirement, shareholders, defined benefit
JEL Classification: D11, E21, E22, G23, G28, J26, J33, K22, K39, M52
Suggested Citation: Suggested Citation