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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 6, No. 2: January 27, 2005
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Publisher: Employment, Labor, Compensation & Pension Law Journals
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Editor: PAMELA PERUN
Urban Institute
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Topic of This Issue:
Defined Contribution Plans
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Explaining the Size of the Mutual Fund Industry Around the
World"
Journal of Financial Economics, Forthcoming
AJAY KHORANA
Georgia Institute of Technology
Finance Area
HENRI SERVAES
London Business School
Centre for Economic Policy Research (CEPR)
PETER TUFANO
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
"The Defined Contribution Paradigm"
Yale Law Journal, Vol. 114, No. 3, December 2004
EDWARD A. ZELINSKY
Cardozo Law School
"Demographic Development and Moral Hazard: Health Insurance with
Medical Savings Accounts"
Geneva Papers on Risk and Insurance: Issues and Practice,
Vol. 29, No. 4, pp. 689-704, October 2004
JONAS SCHREYOGG
Technical University of Berlin
Faculty of Economics, and Management
"Social Security: What Now?"
Tax Notes, Vol. 106, No. 4, January 24, 2005
LAURENCE SEIDMAN
University of Delaware
Economics
"The Consultants Guide to Stable Value"
Journal of Investment Consulting, Vol. 7, No. 1, Summer
2004
CHRISTOPHER B. TOBE
AEGON Institutional Markets, Inc.
WORKING PAPERS
"Tax Policy and Education Policy: Collision or Coordination? A
Case Study of the 529 and Coverdell Saving Incentives"
SUSAN M. DYNARSKI
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Explaining the Size of the Mutual Fund Industry Around the
World"
Journal of Financial Economics, Forthcoming
BY: AJAY KHORANA
Georgia Institute of Technology
Finance Area
HENRI SERVAES
London Business School
Centre for Economic Policy Research (CEPR)
PETER TUFANO
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
Paper ID: AFA 2005 Philadelphia Meetings Paper
Contact: AJAY KHORANA
Email: Mailto:ajay.khorana@mgt.gatech.edu
Postal: Georgia Institute of Technology
Finance Area
755 Ferst Drive
Atlanta, GA 30332 UNITED STATES
Phone: 404-894-5110
Fax: 404-894-6030
Co-Auth: HENRI SERVAES
Email: Mailto:hservaes@london.edu
Postal: London Business School
Sussex Place
Regent's Park
London NW1 4SA, UNITED KINGDOM
Co-Auth: PETER TUFANO
Email: Mailto:PTUFANO@HBS.EDU
Postal: Harvard University
Finance Unit
Boston, MA 02163 UNITED STATES
ABSTRACT:
This paper studies the mutual fund industry in 56 countries and
tests various hypotheses to explain the extent to which this
innovative form of financial intermediation has flourished.
Consistent with related findings from the law and economics
literature, the mutual fund industry is larger in countries with
stronger rules, laws, and regulations, specifically where mutual
fund investors' rights are better protected. The industry is
smaller in countries where barriers to entry are higher,
measured by the effort required to set up a new fund. The fund
industry is larger in countries with wealthier and more educated
populations, and where the industry itself is older. The fund
industry is also larger in countries in which defined
contribution pension plans are more prevalent and where trading
costs are lower. These results indicate that laws and
regulations, supply-side, and demand-side factors simultaneously
affect the size of the mutual fund industry. These factors are
also related to the recent growth rates of the fund industry
across nations.
______________________________
"The Defined Contribution Paradigm"
Yale Law Journal, Vol. 114, No. 3, December 2004
BY: EDWARD A. ZELINSKY
Cardozo Law School
Contact: EDWARD A. ZELINSKY
Email: Mailto:ZELINSKY@PRODIGY.NET
Postal: Cardozo Law School
55 Fifth Ave.
New York, NY 10003 UNITED STATES
Phone: 212-790-0277
ABSTRACT:
Pension cognoscenti have frequently remarked on the stagnation
of defined benefit pensions and the concomitant rise of defined
contribution plans. This Article suggests that over the last
generation something more fundamental, which can justly be
called a paradigm shift, has occurred. Americans today primarily
conceive of and implement retirement savings in the form of
individual accounts. Such accounts have become primary
instruments of public policy, not just for retirement savings,
but increasingly for health care and education as well.
This Article contends that the defined contribution society as
it has emerged today constitutes a fundamental transformation of
the way Americans think about and implement tax and social
policy. The defined contribution paradigm began to emerge with
ERISA’s creation of the IRA and evolved further with the
creation and popularization of 401(k) accounts. During the
1990s, policymakers adapted defined contribution accounts to
cover savings for health care and education. To varying extents,
Americans today can undertake the bulk of their most significant
savings - for retirement, health care, and education - in
defined-contribution-style accounts.
Today, the policies likely to be adopted are those that
channel government subsidies through individual accounts
controlled by the taxpayer herself. In contrast, defined benefit
arrangements - as exemplified by the traditional pension plan
and the federal Social Security system - are less likely to be
proposed, adopted, or expanded. The defined contribution
paradigm has major tax policy implications as well. As a result
of the increasing prevalence of defined contribution programs,
upper-middle-class taxpayers can undertake most of their
significant financial savings through these tax-favored
accounts. If Congress ever formally transformed the Internal
Revenue Code into a federal consumption tax, the defined
contribution paradigm would have paved the way by acclimating
the public to a system in which savings may be undertaken on a
tax-free or tax-advantaged basis.
______________________________
"Demographic Development and Moral Hazard: Health Insurance with
Medical Savings Accounts"
Geneva Papers on Risk and Insurance: Issues and Practice,
Vol. 29, No. 4, pp. 689-704, October 2004
BY: JONAS SCHREYOGG
Technical University of Berlin
Faculty of Economics, and Management
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=605156
Contact: JONAS SCHREYOGG
Email: not available
Postal: Technical University of Berlin
Faculty of Economics, and Management
Department of Health Care Management
Berlin, 10585 GERMANY
ABSTRACT:
In times of ever-rising health expenditures it is becoming more
and more obvious that conventional models for funding health
care are increasingly experiencing difficulties in meeting this
challenge. The concept of Medical Savings Accounts ("MSAs")
represents an innovative and so far rarely analysed alternative
for the funding of health care systems. In this concept an
anticipated amount of money needed is saved up by each
individual in a special account set aside to cover health care
expenses. Since, however, health care expenses for certain kinds
of treatment frequently exceed the financial capacity of the
individual, Medical Savings Accounts are normally introduced in
combination with health insurance covering defined services with
higher financial risk. From a theoretical point of view the MSA
concept helps to counteract the phenomenon of moral hazard in
health insurance systems, at the same time coping with the
future challenges posed by demographic development. This paper
also examines experience gained so far in the implementation and
use of Medical Savings Accounts in different countries. It draws
a mixed but positive picture of the results. Therefore it could
be feasible to integrate certain elements of this concept into
health care systems of European countries.
______________________________
"Social Security: What Now?"
Tax Notes, Vol. 106, No. 4, January 24, 2005
BY: LAURENCE SEIDMAN
University of Delaware
Economics
Contact: LAURENCE SEIDMAN
Email: Mailto:SEIDMANL@BE.UDEL.EDU
Postal: University of Delaware
Economics
411 Purnell Hall
Newark, DE 19716 UNITED STATES
ABSTRACT:
Laurence Seidman is Chaplin Tyler Professor of Economics at the
University of Delaware and the author of Funding Social
Security: A Strategic Alternative (Cambridge University Press,
1999). He contends that even if nothing is done, Social Security
will face a problem, not a crisis, after 2042: A 27 percent cut
in the monthly benefit that would still leave the benefit after
inflation larger than today's benefit. To avoid that 27 percent
benefit cut after 2042, he offers three recommendations to be
implemented as soon as possible: tax payroll above the Social
Security ceiling; gradually reduce the replacement rate for
high-income earners; and gradually raise the age of full
benefits and the age of early retirement by one year. To achieve
a bipartisan package, he recommends considering optional
individual accounts provided seven conditions described in his
article are met.
______________________________
"The Consultants Guide to Stable Value"
Journal of Investment Consulting, Vol. 7, No. 1, Summer
2004
BY: CHRISTOPHER B. TOBE
AEGON Institutional Markets, Inc.
Contact: CHRISTOPHER B. TOBE
Email: Mailto:tobecb@aol.com
Postal: AEGON Institutional Markets, Inc.
400 West Market Street
Louisville, KY 40202 UNITED STATES
Phone: 502-560-3105
Fax: 502-560-4343
Note: This is a description of the paper and not the actual
abstract.
ABSTRACT:
Stable value is a unique asset class that provides consistently
better returns than money market funds. It is an asset class
with very low return volatility, protection of principal and
interest, and low fees (many times, even lower than money market
funds). It is also little known, especially outside the U.S.
defined contribution (DC) retirement market. When I worked as a
consultant, I had little knowledge of stable value. Now, as a
former consultant working in the stable value industry, I know
that investment consultants who are looking for proactive
solutions and new ideas for their clients need to learn about
this important asset class.
The purpose of this article is to provide consultants with a
basic foundation of knowledge about stable value and how it is
used (primarily in the DC world). Certainly, any consultant who
works with 401(k) plans or other DC plans, where stable value is
most popular, needs to have a basic understanding of stable
value. But consultants who work with defined benefit plans,
endowments, foundations, Taft-Hartley plans, non-profit
hospitals, even high net worth individuals in the 401(k)
rollover market, can also benefit from an understanding of
stable value for its potential applications in those markets.
JEL Classification: G23
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Tax Policy and Education Policy: Collision or Coordination? A
Case Study of the 529 and Coverdell Saving Incentives"
BY: SUSAN M. DYNARSKI
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=515251
Paper ID: NBER Working Paper No. W10357
Date: March 2004
Contact: SUSAN M. DYNARSKI
Email: Mailto:Susan_Dynarski@harvard.edu
Postal: Harvard University
John F. Kennedy School of Government
79 John F. Kennedy Street
Cambridge, MA 02138 UNITED STATES
Phone: 617-496-2077
Fax: 617-496-2554
ABSTRACT:
529 saving plans and Coverdell Educational Savings Accounts are
marketed as attractive vehicles for college savings. The main
finding of this paper is that college savings plans can actually
harm some families. The joint treatment by the income tax code
and financial aid system of college savings creates tax rates
that exceed 100 percent for those families on the margin of
receiving additional financial aid. Since even families with
incomes above $100,000 receive need-based aid, the impact of
these very high taxes is quite broad. I find that an
aid-marginal family with funds in a Coverdell is worse off than
if it did not save at all. Simulations show that $1,000 of
pretax income placed in a Coverdell for a newborn and left to
accumulate until college will face income and aid taxes that
consume all of the principal, all of the earnings and an
additional several hundred dollars. This perverse outcome is the
product of poor coordination between the income tax code and the
financial aid system.