Employees, pensions, and the new economic order

The "New Economic Order" in the United States is a regime of trade liberalization, a robust market in corporate control, and labor market flexibility. Among the consequences over the 1980-1995 period is a divergence between the growth rate of corporate profits and stocks prices, which have increased by approximately 250% in real terms, and wages, which have barely increased at all, except for the top quintile. Contrary to popular belief, employees have not significantly participated through their pension funds in this stock market appreciation. In the historically dominant defined benefit pension plan, the sponsoring firm, not the employee, is the residual claimant. Although employees are residual claimants of defined contribution plans, these funds have been underinvested in equity. In part this is because employees fear the volatility of equity returns. This Essay proposes a new capital market instrument, a "pension equity collar," that would take advantage of the longterm nature of pension fund investing to provide a guarantee of a minimum return close to the longterm average equity return in exchange for giving up (or sharing) the upside above the longterm average. Such an instrument could encourage greater employee equity investment and thus widen the distribution of the benefits of the New Economic Order. This essay proposes that the U.S. Department of Labor initiate a rulingmaking project under Section 404(c) ofERISA to determine if such an instrument should be among the menu of choices provided to employees in defined contribution plans.