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    MAY 4, 2006
 
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Fox prof aims to keep tarnish off golden years

Jack VanDerhei is looking to save retirement plans everywhere, and is using new computer simulations and congressional testimony to do it

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Photo by Ryan S. Brandenberg/University Photography
For 12 years, Jack VanDerhei, an associate professor of risk management and insurance at The Fox School, has collected and tracked information about how people save for retirement. He now routinely uses his data to advise legislators and companies about benefits plans.

From his podium at the front of the class, Jack VanDerhei peers at his students from behind his glasses. But much like a certain Clark Kent counterpart, when this Fox School faculty member is not at his day job as associate professor of risk management and insurance, he goes from mild-mannered researcher to a kind of quiet hero.

VanDerhei may not have X-ray vision, but he does have super foresight. Twelve years ago, in anticipation of the collapse of defined benefit plans as we knew them, VanDerhei started collecting information about how people were saving for retirement. His database has since grown to hold data from 16.5 million accounts, which he uses to track trends and create simulations. And since there is no other similar database, VanDerhei has taken on sharing the results of his data analysis, the problems he uncovers and their possible solutions as a responsibility.

About 20 years ago, if you worked for a company that had a retirement plan, you probably had a retirement income guaranteed for life, a defined benefit plan. But recently, newer companies started relying exclusively on defined contribution plans, most commonly a 401(k). This forced larger companies to rethink their expensive retirement benefits, and some, like GM, IBM, Verizon, Sprint and Hewlett Packard, are freezing their defined benefit plans.

“Now, unless you’re a government employee or part of a union, then you probably have nothing but a defined contribution to rely on for future income,” VanDerhei said. “I knew it was just a matter of time before big companies started switching their emphasis from defined benefit to defined contribution plans, so I figured I should try to find out what was going to happen to defined contribution participants.”

The outlook has not been good. According to a recent survey done by the Employee Benefit Research Institute, the think tank that collects the data VanDerhei uses in his research, more than 60 percent of families are counting on a defined benefit plan check after retirement; yet because of all the freezes, only 41 percent of families are actually covered by defined benefit plans — and that percentage is expected to decrease.

Up until companies started freezing their pension plans, the only research conducted was based on aggregate information. Such research doesn’t take into consideration how defined contribution participants are actually allocating their funds.

“If I was going to ever figure out what would happen to people after retirement, I’d have to go back and do it on an individual level,” VanDerhei said, explaining his thoughts when he first became aware of the problem.

“I knew someone was going to have to figure out how to restructure the pension plan laws in such a fashion that people who have nothing other than Social Security and 401(k)’s end up with adequate retirement income,” he added.

VanDerhei’s simulations can also test the effects of different pension plan designs, and reveal options that could save the day. His simulations have been featured in the media from The Wall Street Journal to NPR to CNN, and have attracted the attention of legislators.

Recently, USA Today featured a model of automatic enrollment, which VanDerhei developed in collaboration with the Investment Company Institute. VanDerhei used this model to simulate the overall increase in retirement income that would occur should all companies with 401(k) plans adopt automatic enrollment, which places employees in plans as soon as they’re hired.

While still giving employees the option to stop contributing to their 401(k), automatic enrollment lets inertia work to their advantage, since most people are not proactive about allocating funds. VanDerhei’s automatic enrollment simulation highlighted the need for regulatory or legislative safeguards for companies; as it currently stands, a company that uses automatic enrollment may subject itself to liability exposure if employees suffer investment loss. Recently, the Department of Labor committed to addressing the issue.

VanDerhei is working hard in Washington on other issues as well. He has been testifying in Congressional hearings since 1987 as an expert witness about pensions and 401(k) plans.

“I realized what a limited audience there is for academic research. But if you go out and testify to the Ways and Means or the Senate Finance committees, and actually help craft what is going to be public policy, it’s great to know that what you’re doing will make a positive difference for literally millions of people,” VanDerhei said.

Most recently, VanDerhei testified before the Senate Special Committee on Aging. In 2002, he also did some damage control on the Enron case.

“When Enron went under, not only did employees lose their jobs, but they lost a major portion of their retirement income also,” VanDerhei said.

VanDerhei determined that prohibiting company stock in 401(k)’s — as some senators had proposed in response to the disaster — would leave employees with less money for retirement.

Whether he’s helping a legislator, a confused employee or student, for VanDerhei, it’s all about education. And as he continues to work tirelessly to improve the problems with defined contribution plans, once again Jack VanDerhei shows himself a metaphorical Man of Steel.

- By Julia Straka

 

 


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