51:1 Retirement Revolution: Unmitigated Risks in the Defined Contribution Society

Abstract

A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (defined benefit plans) to self-directed accounts in defined contribution plans like the 401(k) and has drastically changed how people invest in the stock market and why. The prevalence of these self-directed accounts has created our defined contribution society and a new class of investors—the citizen shareholders—who enter the private securities market through self-directed retirement plans, invest for long-term savings goals, and are predominately 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.”

The retirement revolution from pensions to 401(k) 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 life-long responsibility of asset management. Research indicates that citizen shareholders, particularly those who are women, minorities, and those with lower education levels, often lack the financial literacy necessary 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. I suggest that these risks could be better managed and mitigated through a series of structural and individually focused reforms.