Originally published August 28, 2009
At the request of Chairman George Miller of the U.S. House Committee on Education and Labor, the Government Accountability Office (GAO) on August 24, 2009, issued the report Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs. The report is positioned as 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 other countries (specifically, 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 also includes modeling of the effects of a compulsory defined contribution system for employers (i.e., universal access), varying as to 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) with defined contribution plan savings at retirement.
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, by type of plan—defined contribution (DC) or defined benefit (DB)—where that risk particularly applies:
Potential Risk |
Applies to: |
|
DC plans |
DB plans |
|
Lack of consistent coverage |
X |
X |
Inadequate contributions |
X |
|
Investment returns/asset allocation decisions |
X |
|
Lack of portability upon change in employment |
|
X |
Benefit "leakage" prior to retirement |
X |
|
Benefit erosion by administrative or investment fees |
X |
|
Lump-sum payout of benefits upon retirement |
X |
X |
By way of comparison, GAO also reported on features in the private pension systems in 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 selectively describes recent proposals for alternative approaches to the U.S. pension system. 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 included; they generally are more limited in scope than the four approaches described in the report. GAO also discussed two additional proposals, for encouraging annuitization under DC plans. These six proposals are summarized in the following chart:
Proposal |
Source |
Key Features |
Super Simple Savings Plan |
Urban Institute |
|
New Benefit Platform for Life Security |
ERISA Industry Committee (ERIC) |
|
Universal 401(k) |
New America Foundation |
|
Guaranteed Retirement Account |
Economic Policy Institute |
|
Automatic Trial Income |
Retirement Security Project |
|
Security Plus Annuity |
Aspen Institute |
|
Given its scope, the report's consolidated discussion of these retirement policy matters—intended to describe rather than to advocate, and without the recommendation or endorsement of any approach by GAO—provides a useful perspective on these issues.
© 2009 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.