Millions of American workers remain without an employer-
sponsored retirement savings plan.
In fact, some 40% of employers don’t sponsor a retirement plan. Most of those employees don’t save for retirement through individual retirement accounts.
As a result, they will have minimal retirement savings when they no longer can work and will be wholly dependent on Social Security.
The Pension Rights Center, a Washington consumer organization that follows retirement plan rights, recently unveiled a series of proposals designed to help overcome the retirement savings shortfall.
Although most of the proposals are aimed at providing small companies with retirement plan options they could provide to their employees, they also may appeal to large and midsize employers. Others are aimed at making retirement saving easier and more attractive for individuals.
All the proposals are well thought out and deserve serious study and consideration, not only by employers but also by financial professionals and members of Congress.
The key proposals are two new types of guaranteed pension plans: The Guaranteed Account Plan is a new type of “hybrid” plan. Like a cash balance plan, it takes some of the features of traditional defined benefit pension plans and combines them with features of 401(k) plans.
Under a GAP, employers contribute to employees’ pension accounts, guarantee a promised rate of return — as low as 3% a year — and provide retirement benefits as annuities. However, the funding rules for GAPs are simple and will protect the employer from steep future funding increases.
It differs from a cash balance plan in that its structure is close to the older money purchase plan with employer guarantees, and it provides an annuity at retirement.
The second type of plan, the Plain Old Pension Plan, is a simplified, DB pension plan that is easy for employers to create, fund and administer.
It has simpler and more predictable funding rules than other DB plans, while still providing a lifetime stream of income for retirees through annuities, and the retirement benefits ultimately are guaranteed by the Pension Benefit Guaranty Corp. in Washington.
The Pension Rights Center also proposed a new plan, called the Model T, to promote expanded coverage among small businesses. This is a simplified, low-cost, multiple-employer payroll deduction defined contribution plan that will be marketed by financial institutions to small employers where the coverage rates are the lowest.
The Model T’s simplicity should lend itself to effective marketing techniques. It could be offered by banks, insurance companies, brokerage firms and mutual fund companies. To keep the plan simple, investment choices would be limited to five or less, and fiduciary responsibility would be transferred from the employer to the plan provider.
For simplicity and to maintain the retirement income focus, no hardship withdrawals would be allowed, but employees would be allowed to borrow up to 50% of their balances.
The Pension Rights Center also proposed a new plan to encourage individuals to save for retirement called the Retirement Investment Account. This establishes a new national clearinghouse structure to administer portable IRAs.
This structure provides an easy and efficient way for workers who aren’t covered by plans to save for retirement.
These proposals do offer new ideas to stimulate better retirement income saving. There are a number of questions that need to be addressed, however.
Perhaps the key one is: Are the simplified structures of the plans enough of an incentive for small employers to consider offering retirement benefits to employees, especially in a DB structure where they bear most, if not all, of the cost, modest though it may be?
Many small employers have such low margins they may not be able to contribute 3% of pay per year to a simple DB plan without reducing employee wages by some or all of that. Perhaps additional incentives would be needed.
Nevertheless, anyone in the financial services industry concerned about national savings and retirement income issues — and that should be most professionals — should read the report “Conversation on Coverage,” think about what is possible and provide feedback to the Pension Rights Center.
These good ideas can be polished further to the point where Congress might react.