The Markets November 10, 2011

Ghilarducci Suggests Giving Private Workers Access to State Pensions

Teresa Ghilarducci, director of The New School's Schwartz Center for Economic Policy Analysis (SCEPA), drafted a proposal to offer low-fee, low-risk personal retirement accounts to all workers by providing private-sector labor access to state-level public retirement institutions. 
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Under Ghilarducci’s plan, private-sector workers or employers could voluntarily open an account in a state-level public retirement fund such as the California Public Employees’ Retirement System or CalPERS. Workers and/or employers would contribute at least 5% of pay into an account guaranteed to earn at least 3% above inflation. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life.   

“The recession’s effects on state budgets has diverted the discussion about pension reform to the promises made to public sector retirees,” said Ghilarducci, according to a press release. “While state officials debate how to reform public pensions, all workers deserve access to safe, effective retirement plans. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.”  

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The proposal takes advantage of existing state pension infrastructure to invest private-sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. In fact, public pension plans outperformed 401(k) plans or IRA accounts by 20 to 40% over the last 30 years. These funds are able to use their bargaining power to lower fees, and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from swings in asset prices.  

All states could offer a similar structure overseen by an independent board of trustees and administered like the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail market.    

Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job. Though these funds would be kept in a separate investment pool from public sector funds, having private sector workers invested in the same system would shore up public support for state public pension funds.   

Ghilarducci previously advocated for a "Guaranteed Retirement Account" (funded by a 5%-of-pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans (see "IMHO: The Pit and the Pendulum"). Also, she suggested allowing workers to "trade their 401(k) and 401(k)-type plan assets" for one of those Guaranteed Accounts.  

Read more about Ghilarducci’s thoughts on retirement plans  here.  

In a video, Ghilarducci, Employee Benefit Research Institute (EBRI) CEO Dallas Salisbury, and Alex Brill from the National Commission on Fiscal Responsibility and Reform discuss 401(k)s and possible replacements (see "Should We “Ditch” 401(k) Plans?"). 

In Practice November 10, 2011

Half of Participants Unattached at Retirement

Two market-research firms have found that more than half of defined contribution plan participants do not have a relationship with a financial adviser around the time of retirement.  
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In their third annual “2011 DC Participant Experience Study,” KK & Company and Greenwald & Associates concluded that retirement plan advisers and providers have ample opportunity for growth at the time participants retire. This opportunity has been created by a confluence of factors, the market-research firms found, such as:

  • Forty-five percent of participants plan to roll their account value to another company when they retire
  • Half (48%) have worked with a financial adviser on retirement planning.
  • Two-thirds (65%) do not have a written financial plan

“The main reasons for rolling money out is the relationship the participant has with another financial institution or adviser,” said Matthew Greenwald.

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The involvement of most participants in their retirement plan can best be described as reactive, the firms report. Sixty-seven percent only review the plan balance when it is sent to them and another 5% do not look at the communications they receive about the plan. Seventeen percent go online at least monthly to make changes, if needed.

In addition, the major increase in the number of participants who will retire with significant assets during the next decade is worthy of attention, the report contends. Near-retirees (ages 55-70) have more assets to invest than the “average” participant:

  • 21% have $50,000 to $149,000
  • 17% have $150,000- $249,000
  • 18% have $250,000- $499,000
  • 10% have more than $500,000

“According to U.S. Census Bureau data and projections, our old population pyramid is shifting rapidly,” says Kendall Kay, president of KK& Co. “In 2000, 32 million of the 320 million U.S. population were ages 55-69. By 2010, this segment had grown 50% to 47 million. This growth will continue and by 2020 the estimate is for 59 million people in this age band, effectively doubling in just two decades.”

KK & Company and Greenwald & Associates assert that there are five areas that could be enhanced for advisers and providers to maximize this opportunity:

1. Participant relationship management

2. Pre-retirement education and planning

3. Retirement income education and management

4. Development of new products that deliver dependable retirement income and guaranteed lifetime income

5. Enhanced Web site functions

Greenwald & Associates and KK & Company surveyed 1,000 defined contribution plan participants.  Respondents were at least 21 years old, employed full-time, and enrolled in their employer’s plan, regardless of whether they make contributions to the plan.   

 

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