Wednesday, February 21, 2007

Ownership Society - Increasing

The United States is increasingly becoming an "ownership society." More and more people own stocks, either directly or through mutual funds and especially 401(k) programs and their equivalents. The American Shareholders Association blog is going into great detail with graphics. The rapid growth of defined contribution plans changed America by enabling millions of Americans to create wealth which they own and control. Previously, workers were in defined benefit plans whereby employees would receive a check for life as a percentage of their salary. These payments could be cut at anytime, however, as evidenced recently by the massive reductions placed on airline workers and other old economy manufacturing industries. But with a defined contribution plan workers can move their retirement income from one job to the next and they truly own and control. Defined contribution plans also allowed Americans to experience the process of wealth creation for the first time. Rarely does a factory worker wake up and start picking stocks. Rather it is a gradual process and defined contribution plans are the gateway to real wealth creation. Seeing the funds accumulate in value workers then purchase mutual funds for more near term savings and the process of savings begins. And 2006 brought inprovements. Give credit to its source: President Bush.
The Pension Protection Act made several key changes to defined contribution and defined benefit plans which has forced Morgan Stanley to increase their forecast for net equity defined contribution flows from $11 billion in 2008 to $30 billion. If you are keeping score this is a 172 percent increase in annual net flows. Very positive for growth, wealth creation, and retirement savings. On the defined contribution side. First, the legislation made expanded 401(k) and IRA contribution amounts permanent. Originally signed into law as part of the 2001 tax cut these are the only Bush tax cuts made permanent to date and will ensure these flows are not reduced with the rest of the tax cuts expiring. Second, the legislation removed the barriers to employers automatically defaulting their employees into the 401(k) plan. Defined benefit plans were always mandatory. However, workers needed to opt into defined contribution plans. Employers were skittish for legal reasons to automatically enroll their employees and the legislation removed these barriers. A number of news reports show a dramatic jump in automatic enrollment since the legislation passed and this will increase the number of people participating in 401(k)รข€™s and the amount of equity flows for markets.

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