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.

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.

The focus of Working Group II was to develop new incentives and proposals to encourage more individual workers in the private sector to save - not only those who do not have an employer plan, but also those who may not be eligible for their employer's plan or who may not have chosen to participate. The Group focused on expanding coverage for low- and moderate-income workers, who are least likely to have access to a plan.

They put forth a proposal for a new plan that will encourage individuals to save for retirement:

The Retirement Investment Account (RIA) - establishes a new national clearinghouse structure to administer portable individual retirement accounts. This structure provides an easy and efficient way for workers who are not covered by plans to save for retirement.

Working Group III focused on ways of encouraging small businesses to adopt retirement savings plans - a focus chosen because small businesses not only represent the fastest growing employment sector in the economy, they have the largest block of workers without a workplace retirement plan. The group cited studies show that small businesses would be more likely to start a plan if administrative costs, complexities, and fiduciary responsibilities were reduced and if employer contributions were voluntary.

According to their report, taking a page from Henry Ford's Model T, which became a symbol

of affordable transportation for the masses, the Group decided to create its own clean-slate proposal which they named the Model T plan.

The Model T plan is a new simplified, low-cost multiple employer payroll deduction plan which will be offered by sold and marketed by financial institutions to small employers where the coverage rates are the lowest. The Model T's simplicity should lend itself to effective marketing techniques.

As envisioned by the group, the Model T plan is an inexpensive and accessible savings vehicle that could be sold and marketed to small employers. Designed to be sold as a multiple employer plan, it could be a potentially efficient way of reaching numerous small businesses at once, creating momentum toward increasing coverage, and lending itself to effective marketing techniques, according to the group.

"The Conversation on Coverage has been an extraordinary process," said Karen Friedman, policy director for the Pension Rights Center and director of the initiative in a press release. "Everyone involved united under one mission -- to increase coverage - and spent countless hours developing these proposals. Covering the Uncovered represents the culmination of all of their hard work."

The final recommendations are online HERE