Conversation on Coverage Issues Recommendations

May 14, 2007 ( - With less than half the nation's working adults covered by a workplace retirement program, a group of industry experts has put their heads together to focus on solutions.

By Nevin E. Adams | May 14, 2007
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The so-called Conversation on Coverage - convened by the Pension Rights Center, along with a coalition of providers, researchers, and industry groups, on Friday issued a series of recommendations. The recommendations were developed by more than 45 experts of varying perspectives ; the business community, unions, financial institutions, retiree organizations, and academia.

Working Group 1

Working group 1 sought to find ways to preserve the features of defined benefit plans that make them attractive to employees; the fact that defined benefit plans are employer-funded and that the investment risk is placed on the employer and not the employee, as well as offering protection for spouses through survivor annuities, and the fact that these plans generally pay out benefits in a lifetime income stream. They also cited several of the chief disincentives of these programs:

  • the volatile and unpredictable funding requirements
  • the lack of attractive, easy defined benefit designs that can be marketed by financial institutions to small- or medium-sized businesses
  • the perception among businesses that their employees do not value or understand these defined benefit plans and would prefer 401(k) plans

Among their recommendations were two new types of guaranteed pension plans, which recognize that employees need income they can count on in retirement ):

The Guaranteed Account Plan (GAP) - a new type of "hybrid" plan that takes some of the features of traditional pension plans and combines them with features of 401(k) plans. In this plan the employer credits a contribution to an individual's account based on a percentage of that employee's pay and then guarantees the return on the contributions. The employer assumes the risk of investing the money to obtain the specified promised rate of return, and the basic benefit is paid as a lifetime annuity that begins at the time of retirement with a guaranteed spousal survivor annuity.

The Working Group acknowledged that the GAP would, in many respects, resemble a cash balance plan. Through what the Group described as "reverse engineering", GAP was designed as a mirror image of the cash balance plan. Rather than start with a defined benefit plan that has notional accounts, GAP starts with the regulatory framework for money purchase pension plans.

The Plain Old Pension Plan (POPP) is a new simplified traditional defined benefit pension plan that is easy for employers to create, fund, and administer. The POPP has simpler and more predictable funding rules than other defined benefit plans, while still providing a lifetime stream of income for retirees. It is an employer-funded plan that starts with a modest guaranteed benefit to allay employer concerns about committing to large future pension funding obligations. The basic benefit is based on a percentage of the employee's career-average pay and is paid to the employee as an annuity with a guaranteed spousal survivor benefit. One important feature of the plan enables companies to provide bonus benefits in good years and scale back to the basic benefit formula in leaner years.