The Center for American Progress Rethinks Retirement Savings

By :: August 22nd, 2013

Kudos to Rowland Davis and David Madland at the Center for American Progress for rethinking retirement savings. In a paper with the rather understated title “American Retirement Savings Could Be Much Better,” the authors attempt to stitch together the best of defined contribution plans and defined benefit pensions.

Their preferred vehicle is what’s known as a collective defined contribution plan (they call their version the Secure, Accessible, Flexible, and Efficient (SAFE) plan).

Today, workers in 401(k) plans bear full investment risk and often struggle with how to allocate their retirement savings and what to do with their assets when they change jobs or retire. With SAFE, those risks would be mitigated. Enrollment would be automatic, savings fully portable, and investment funds pooled and professionally managed. Accounts would be automatically annuitized as in traditional DB plans.

Investment pools would be run by private non-profits but professionally managed. Employers could contribute to workers’ accounts but would have no fiduciary obligations since they’d play no role in managing the assets.

The model attempts to spread risk among workers of all ages and retirees. It also would use a financial tool called a collar aimed at smoothing investment returns. The authors model a plan that aims to credit fund participants with annual returns that range from zero to 8 percent. In years where investment profits top 8 percent, the excess would be held in a notional reserve fund. In years when returns fall below zero those reserves would cover any losses.    

Sensibly, the authors do not promise riskless returns. But they say their model would keep both risks and costs relatively low. They estimate that, by doing so, workers saving through such a model would be more than twice as likely to maintain their standard of living in retirement as workers making identical contributions to a traditional 401(k) plan.

Still, there are plenty of questions about the proposal. To name just three: The estimated returns to these plans seem very optimistic, the transition quite complex and potentially costly, and the government’s role in organizing or reinsuring plans is just not clear.    

One attractive element of the plan is that it builds on existing savings vehicles and does not propose to add any new tax-advantaged schemes to the dozens that already exist. The last thing we need is another savings subsidy.

Many large employers already offer automatic enrollment, life cycle investment funds, and annuitization aimed at improving (401)k plans—often making them look a bit like pensions. But this happens in an ad hoc way and without the benefits of reduced costs and risks that come, at least in theory, with a pooled plan design such as SAFE.

This idea has a lot going for it. At the very least it could jump-start a badly-needed debate over how to build a better retirement system.

16Comments

  1. David Lloyd-Jones  ::  5:10 pm on August 22nd, 2013:

    Henry,

    Good useful post. I’ve got one minor quibble to add to your sound questions:

    The collar suggested for “smoothing returns” looks to me rather like one more fershlugginer bit of engineering to generate brokerage fees.

    It’s fairly easy to hossrassle reported returns from year to year, but there are always costs involved. There is only one genuine way to smooth real returns, and that is diversification.

    Best wishes,

    -dlj.

  2. David Lloyd-Jones  ::  5:10 pm on August 22nd, 2013:

    Apologies,

    Howard, not Henry. My bad.

    -dlj.

  3. Michael Bindner  ::  3:11 am on August 23rd, 2013:

    My small, but not actively funded IRA, has a return of 33% some years. If I keep contributing, it will get bigger faster. Even if I don’t, it can be cashed out for a nice post retirement vacation in Europe or a way to pay off credit card debt.

    Actively managed accounts, even if by non-profits, can still get expensive. More to the point, they are not as good as a plan which invests in insured employer voting stock – with the insurance fund consisting of a third of the stock of all such employee-held companies. The advantage to such a plan is that workers will have an incentive to have their companies succeed as well as the tools to savagely cut CEO salaries. The myth that a celebrity CEO is necessary is balderdash caused by the need to attract investors in the stock market. Privately held companies need no such outlandish bonuses and executives can be found in-house. Someone always wants the job. Employee owned firms can then expand the offerings of services to employees – such items as mortgage lending (at zero interest), payroll lines of credit (and debit) and a much better employee cafeteria (with a slightly lower wage so food could be free).

    This is much better than a warmed over proposal for savings in addition to Social Security. Indeed, to better capture control of the employer, a carve out to Social Security employer contributions could be created (with the employer contribution credited equally to each worker rather than as a match to the employee contribution). What’s the point in being a progressive organization if you don’t actually produce something so progressive that it scares the capitalists into line – and then implement it anyway.

  4. Ralph H  ::  10:43 am on August 23rd, 2013:

    As the sponsor of a small company 401K plan I would welcome being taken out of the loop if I was convinced that it was good for my employees. It is time consuming, expensive (especially for smaller companies), and a pain to fill out all the forms.

    My biggest concern is your proposal to turn over management to a non-profit. I realize that to many “non-profit” is good. To me they often are lazy, often second rate, prone to expand to increase the benefit to those running the, and do not pay their fair share of taxes.

    I realize wall street has often ripped us off, but if the government were to put management out for competitive bid hopefully the winners would be firms like Vanguard with a great track record and low cost of operations.

  5. Hans  ::  10:57 am on August 25th, 2013:

    I am sorry to say, but any government saving program
    is bound to be bad.

    It will be bias, require massive paperwork and not to mention
    the ability for CONgress to make changes which will be beyond
    one’s control.

    Add the complexity to these types of saving programs leaves the
    general population dependent upon civil administrators or specialists for hire.

    All this when a simply passbook savings account will do!

    I call this regressive rather than progressive..

  6. David Lloyd-Jones  ::  5:21 pm on August 25th, 2013:

    Hans,

    Government work is often highly superior to what private firms do in the same situation, perhaps because both government and business have their biases and the biases are different.

    In health care payment, for instance, Canadian government and quasi-governmental institutions carry out all the paperwork for 0.5% overhead on throughput.

    In the United States, by contrast, these functions have traditionally cost a third or more of total throughput, and have made health care coverage so expensive that even with all its wealth America could only cover about 70% of its population.

    One result was that Americans have the shortest life-spans of any of the industrial democracies’ peoples.

    Under the anticipated Obama-Romney-AEI plan oddly called Obamacare, this one third will be legislatively reduced to 25% add-on fees, or 20% of throughput. The savings from universality, which gets rid of a great deal of promotion and advertising cost, are so great that the shares of the insurance companies getting this unnecessary windfall are doing just fine, thank you very much.

    Why business should charge 40 times as much as government would seem hard to explain. Maybe President Obama should hire Mitt Romney to come up to Canada and see what his managerial instincts tell him.

    -dlj.

  7. David Lloyd-Jones  ::  5:24 pm on August 25th, 2013:

    Hans,

    I would be very surprised if you could find any evidence to support the criticisms you make of American “government” savings plans, i.e. legislation which subsidises savings by individuals. Have you even tried?

    It seems to me the fairer and more decent critique of these plans would be that they shower tax exemptions upon the people who need them the least.

    -dlj.

  8. Hans  ::  10:17 am on August 26th, 2013:

    Dear Mr Jones:

    I am sorry, however, I had to chuckle at your first paragraph..

    Regarding the low cost Canadian healthcare cost and the same claims are made by America’s Social Insecurity Administration – there is no FREE lunch…

    Yes, your health system is very cost effective it is also delaying treatment for many suffering patients as well..

    Our current health system is too expensive and need to be restructured and deregulated…The insurance industry are also part of the problem.

    Please remember, that 17% of the USA’s GNP is health related one half of that is government; of which much of it is FREE health care…

    When a bum enters an ER and says “treat me” I pay for it in my next hospital visit; while the former laughs and says “What a great country.”

    The reason Americans have a lower lifespan, is because we send our sons and daughters overseas to fight for other nations freedom…

    BTW, Mr Jones, look at how wonderful the UK health care system is…

    Again, I maintain, that few if any governmental units could operate at a profit, if left in the market place..

    Ted Kennedy sure has been left out of the picture, despite 30 years or more of “fighting” for a government controlled healthcare system…

  9. Hans  ::  10:27 am on August 26th, 2013:

    Dear Mr Jones:

    As I mentioned previously, I oppose ALL subsidies and ALL tax exemptions…

    As I stated there is no need, whatsoever, for any kind of government saving plan, as they are designed to purchase support and votes…

    I will also add, that there should be NO tax on saving accounts as this is nothing more than double taxation…

  10. David Lloyd-Jones  ::  11:23 am on August 26th, 2013:

    Hans,

    You write “The reason Americans have a lower lifespan, is because we send our sons and daughters overseas to fight for other nations freedom…”

    This supposed “fighting for freedom” thing has had exactly one success in the last sixty years: Grenada.

    American deaths in rampaging around Vietnam, Iraq, Afghanistan, Cambodia, Laos, Panama and maybe one or two others have done nothing for anyone’s freedom — but they also don’t add up to a hill of beans in computing life expectancy.

    Americans’ life expectancy is last in the advanced world because roughly a third of Americans don’t have access to health coverage, neither preventative nor curative.

    My surname, as you should be able to see, is “Lloyd-Jones.” Perhaps American health care has not supplied you with adequate eye-glasses.

    -dlj.

  11. Hans  ::  12:50 pm on August 26th, 2013:

    Dear David:

    I will agree with you regarding Vietnam, but shall defer on the remainder…

    Would you be so kind and provide a link which documents over 100 million Americans who do not have access to healthfare?

    Another failed American government program is the federal funding of education,(loans) which stated with the brilliant LBJ Jr at 237 million dollars of funding, which today is now a 105 billion program..Despite this MASSIVE spending, college is more expensive than ever…

    These education loans will never be repaid and it will be the next trillion dollar bubble..

    I am sorry, however, I do not recognize the use of two last names in a singular nor plural form.

    I can address you as David, Sir, or Your Lordship..Please let me known your personal preference.!

  12. Hans  ::  1:13 pm on August 26th, 2013:

    Dear David:

    Please consider this link…It shows how government programs become disincentives for people to work.

    http://johnhcochrane.blogspot.com/2013/07/health-insurance-and-labor-supply.html

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