The Secure Choice Pension for Private Sector Workers
Editor’s note: the following is an excerpt from the white paper “The Secure Choice Pension” by Hank Kim, Esq., Executive Director of the National Conference on Public Employee Retirement Systems, published in September, 2011. The views presented in this paper are not necessarily the views of InFRE but are presented here to help retirement counselors and administrators stay abreast of leading industry thought.
American private-sector workers need a new choice that provides a secure yet flexible retirement program. Most individuals need to save more for retirement. Millions of people are not currently saving enough to allow for a secure retirement. These people may be forced to work longer before retirement, experience a less-than-reasonable quality of life during retirement, or become dependent on public safety net programs.
To meet the needs described above, any new type of retirement program for the private sector needs to take into account the following key principles:
- enhanced lifetime retirement security for all participants;
- flexibility and portability given the increasingly mobile workforce;
- managed and shared risk with protections for employers, employees, taxpayers, and the plan
Private-sector employers need a third option. Public pension plans stand out as a potential model. Such plans have a successful track record of performance in delivering adequate benefits in a sustainable and efficient manner.1
The Power of Public Pension Plans is a Key Part of the Solution
Because of their group nature, public pension plans create significant economies of scale and other economic efficiencies for taxpayers and employees, which allow them to offer retirement benefits in a proficient and cost-effective manner. As a witness testified before a Joint Economic Committee hearing entitled, “Your Money, Your Future: Public Pension Plans and the Need to Strengthen Retirement Security and Economic Growth,” because public pension plan assets are pooled and managed by professionals, these systems can achieve higher returns at a lower cost than the typical defined contribution plan.
In addition, public pension plans pool mortality and other risks, allowing these plans to provide benefits at lower costs for participants and plan sponsors. 2 On average, plan fees can range between 0.8 percent and 1.5 percent of assets; larger institutional plans can reduce such fees to between 0.6 percent and 0.2 percent of assets. 3 By pooling assets, public plans are able to reduce administrative costs and asset management and other fees. Asset management fees have been found to average approximately 25 basis points for public pension plans, while asset management fees for private 401(k) plans are 35 to 145 basis points higher, on average.4
A 2008 study of 130 plan sponsors by Deloitte and the Investment Company Institute (ICI) also found that plan size made a significant difference in fees and other costs. Specifically, the study found that plans with a greater number of participants and larger average account balances tend to have lower overall fees than plans with fewer participants and smaller average account balances. The study theorized that the observed effect was likely caused, in part, from fixed costs required to start and run the plan, many of which are directly connected to legal and regulatory requirements. Larger plans can take advantage of economies of scale because costs are spread over a larger base. 5 The consulting firm Watson Wyatt found that plan size made a particular difference in connection with defined benefit plans, theorizing that this effect could result from the inability of smaller defined benefit plans to afford as much expertise as bigger plans. 6 Larger defined benefit plans outperformed smaller plans by roughly 2 percent. 7 Moreover, professionally managed defined benefit plans have consistently outperformed defined contribution plans. In its latest update comparing investment rates of return in defined benefit and defined contribution plans, Watson Wyatt found that through the end of 2008, median returns for defined benefit plans were approximately 1 percent higher than those obtained in defined contribution plans. 8
In addition to these economic efficiencies, public pension plans also decrease government sp ending by reducing the need for retirees to rely on public assistance. A 2009 report by NIRS calculated that pension income saved the government approximately $7.3 billion in public assistance expenditures in 2006 and kept 1.4 million Americans off public assistance. 9
The Secure Choice Pension Model for Private Sector Workers
The solution we propose below is not a replacement for existing pension plans in the public or private sector. It should be understood to be a basic plan for the private-sector workforce that currently does not have the benefit of a pension plan. Public pension plans are designed to meet different service delivery needs and the longevity of public plan sponsors. Rather, this model takes into consideration the retirement age patterns of private-sector workers and the ability of private employers to offer reasonable, sustainable pension benefits.
Several clear needs must be addressed. Most workers need the certainty and predictability of a lifetime annuity, but they also need choice and flexibility. They need to be able to take their pension with them when they change employers. And they need to have the benefits of professional plan management to achieve these goals.
These important protections involve cost and risk, however. Many private employers are unable or unwilling to assume all the risk on their own. Alternatives are needed for sharing risk with workers and leveraging administrative savings that larger employers can provide.
Public plans and their government sponsors can help provide a model to address the retirement security crisis that faces the private sector. Any new alternative should be influenced by the factors that make public plans a success, including the experience with defined guaranteed benefits and the economies of scale to deliver the necessary investment results in a cost-effective manner. A new choice that draws on these lessons is needed to provide retirement security in the private sector.
The Secure Choice Pension would provide this new choice. It is designed to provide the following:
- The Secure Choice Pension is designed as a public–private enterprise for those who currently do not have a pension (particularly for small and mid-sized businesses).
- The Secure Choice Pension is not a replacement for existing pension plans in the public or private sectors, nor is it intended to replace 401(k)s.
- The Secure Choice Pension will be modeled after a “cash balance” type defined benefit plan, as described in more detail below.
- The Secure Choice Pension in conjunction with Social Security and personal savings, including 401(k)s, will help close the existing $4-8 trillion retirement savings gap as estimated by several research groups.
- The Secure Choice Pension will decrease the burden on state and local governments by reducing the need for retirees to rely on public assistance.
- The Secure Choice Pension will manage downside funding risk through conservative assumptions as developed in a model plan design and/or determined by each state.
- The Secure Choice Pension will provide workers with a guaranteed pension but will permit some opportunity for increased benefits in good economic times.
In summary, the goal of the Secure Choice Pension is to provide private-sector workers who currently do not have access to a pension – particularly those who work for small to midsized companies – with a guaranteed, affordable, sustainable pension through a public–private structure that shares the risk between employers and employees and manages funding risk.
The bottom line is that the benefits of these plans to states and the national government is that future retirees living in their jurisdictions will be contributors to the economy rather than dependent on welfare programs and services, which range from housing to income supplements to medical care.
In March of this year, California became the first state to introduce a Secure Choice legislation. We’ve had discussions with a few other states to follow up on California’s lead. Visit www.retirementsecurityforall.org, to keep abreast of the latest developments on Secure Choice Pensions or to help in the campaign.
Hank H. Kim, Esq., is the executive director and counsel for the National Conference on Public Employee Retirement Systems (NCPERS). Mr. Kim directs the day-to-day operation of the largest public pension trade association in the United States. His responsibilities include strategic planning for NCPERS, promoting retirement security for all workers through access to defined benefit pension plans, and the expansion of NCPERS’ role in the continuing debate on health care.
Representing more than 500 funds throughout the United States and Canada, NCPERS is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage nearly $3 trillion in pension assets. Founded in 1941, NCPERS works to promote and protect pensions by focusing on advocacy, research and education.
1 Christian E. Weller, Testimony before the Joint Economic Committee of Congress, Your Money, Your Future: Public Pension Plans and the Need to Strengthen Retirement Security and Economic Growth (July 10, 2008), http://jec.senate. gov/public/?a=Files.Serve&File_id=03739571-fb35-4dba-8c28-994192726169.
5Deloitte and ICI, Defined Contribution / 401(k) Fee Study: Inside the Structure of Defined Contribution / 401(k) Plan Fees: A Study Assessing the Mechanics of What Drives the “All-In” Fee (Spring 2009, updated June 2009): 7, www.ici.org/ pdf/rpt_09_dc_401k_fee_study.pdf.
6Watson Wyatt, “Defined Benefit vs. 401(k) Investment Returns: The 2006–2008 Update” (Dec. 2009), http://www. watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=22909. 7Ibid.
9Frank Porell and Beth Almeida, The Pension Factor: Assessing the Role of Defined Benefit Plans in Reducing Elder Hardships (July 2009): 17, http://www.ncpers.org/Files/NIRS_pension_factor.pdf. Ibid.
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