The Government Accountability Office recently issued a report titled 'Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs.' The report is a survey of:

• Important risks faced by U.S. workers in accumulating and preserving pension benefits under the current system;

• Approaches used for employer-sponsored pension systems in the Netherlands, Switzerland, and the United Kingdom that could address those risks, as well as the trade-offs involved; and

• The risk mitigation and trade-offs offered by key proposals for alternative pension designs in the United States.

The report, requested by Chairman George Miller of the U.S. House Committee on Education and Labor, includes modeling the effects of a compulsory defined contribution system for employers (i.e., universal access), with variations based on whether enrollment by employees is voluntary, automatic with an opt-out, or mandatory.

Predictably, each successive iteration of the model projects incrementally larger increases in the number of U.S. workers (particularly low-income workers) who would have defined contribution plan savings at retirement under that model.

Redefining retirement plans

With respect to the current U.S. employer-sponsored retirement system, GAO identified the following as key risks that potentially affect any given participant’s retirement security, indicated by the type of plan—defined contribution (DC) or defined benefit (DB) — where that risk particularly applies. The report, for example, cited the lack of consistent coverage and lump-sum payout of benefits upon retirement as potential risks that affect both DB and DC plans.

For comparison, GAO reported on features in the private pension systems in the three other countries that may mitigate risks in accumulating or preserving retirement benefits, including: mandated coverage and contributions, facilitation of portability and annuitized payouts.

GAO also noted features of the Dutch and Swiss systems that spread longevity and investment risk, including (in defined contribution plans): guaranteed minimum rates of return, pooled investment structures and conditional indexation of annuitized payouts.

Finally, the report describes six recent proposals from the private sector for alternative approaches to the U.S. pension system or certain aspects of it. Four of the proposals selected for discussion are presented as approaches for alternative retirement plan designs that are: (1) responsive to at least some of the risks that plan participants currently face; (2) sufficiently detailed to permit analysis; (3) not duplicative of each other; and (4) of recent vintage (proposed or considered in the last five years).

The retirement savings proposals in the Obama Administration’s FY 2010 budget are not discussed; they generally are more limited in scope than the four approaches described in the report. GAO also discussed two proposals, for encouraging annuitization under DC plans. These six proposals are summarized below:

Urban Institute proposes a Super Simple Savings Plan. Key features of the measure include:

• Voluntary system of private sector DC accounts — one plan — with goal of providing minimum base for low- to middle-income workers;

• Simplified plan design;

• Mandatory minimum contributions for employers and employees who choose to participate;

• Government matching contributions;

• Fully vested and portable benefits; and

• No pre-retirement loans or hardship withdrawals from employer or government contributions.

ERISA Industry Committee recommends the New Benefit Platform for Life Security plan. Key features of the proposal include:

• Private sector benefit administrators provide DB and DC plans with the primary goal of expanding DB coverage;

• Employers or employees can set up plans through a centralized system;

• No required minimum contributions;

• Fully vested and portable benefits;

• Privately guaranteed return, mandatory annuitization for DB plans; and

• Preset fund mixes, no pre-retirement leakage for DC plans.

New America Foundation advocates the Universal 401(k) plan. Key features of the initiative include:

• Voluntary government-established DC plan with the goal of providing universal access to a government administered supplemental plan;

• Employers or employees can set up plans with an automatic enrollment with opt out option; and

• Voluntary employer contributions, default participant contribution and government matching contribution;

• Default investment in life cycle funds;

• Fully vested and portable benefits;

• No pre-retirement loans or hardship withdrawals from employee contributions; and

• Default annuitization of retirement payout with lump-sum option.

Economic Policy Institute recommends a Guaranteed Retirement Account measure. Key features of the proposal include:

• Government-established hybrid DB/DC plan with goals of increasing coverage and contributions and preserving benefits;

• Mandatory for all workers without equivalent DB plan;

• Mandatory minimum employer and participant contributions;

• $600 refundable tax credit for all workers;

• Minimum investment return guaranteed by government;

• Fully vested and portable benefits;

• Only pre-retirement leakage is hardship withdrawals in case of disability; and

• Mandatory annuitization on retirement with inflation adjustment, but with partial lump sum allowed.

Retirement Security Project proposes the Automatic Trial Income initiative. Key features of the proposal include:

• On retirement, trial annuitization of a substantial portion of DC plan participant’s benefit, with opt-out;

• After 2 years, trial annuity converts to permanent annuity unless participant elects lump sum; and

• Plan selects insurance company for trial and permanent annuities and can select type of annuity product (e.g., inflation-adjusted annuity).

Aspen Institute proposes the Security Plus Annuity initiative. Key features of the proposal include:

• In first year of retirement, one-time opportunity for DC plan participant to elect basic life annuity up to $100,000;

• Through competitive bidding process, government selects private sector insurance companies to provide annuities at group prices;

• Government pays out annuity benefits with Social Security benefits; and

• Government also provides recordkeeping, marketing and other services.

Given its scope, the report’s consolidated discussion of these retirement policy matters, which is intended to describe alternatives, rather than to advocate, and thus includes no recommendation or endorsement of any approach by GAO, provides a useful perspective on these issues.

Carol A. Weiser can be reached at carolweiser@sutherland.com.

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