Re-Envisioning Retirement Security: Insured Defined Contribution Plan System

The following proposal was presented by Regina Jefferson at the Re-Envisioning Retirement Security Conference on October 21, 2009.

Insured Defined Contribution Plan System

The proposal aims at achieving universal coverage in the private retirement system by coupling a mandatory universal retirement system with a defined contribution insurance program.

A Universal Private Retirement System would cover all individuals earning wages and would give employers the option of either electing to sponsor a plan providing guaranteed benefits, or forwarding contributions to a clearinghouse established by the Social Security Administration.  The clearinghouse would offer the employer a limited choice of guaranteed pooled investment options and would serve as record-keeper for the program.  The guaranteed benefit provided may either be an insured individual account, or a defined benefit plan.  For employers electing the insured individual account approach or the clearinghouse, the proposal requires a six percent of pay contribution into the individual account.  The portion of contributions from employees, employers and the government would be determined based on the worker’s pay with employer and government contributions phasing out as compensation increases beyond a certain level.

The Defined Contribution Insurance Program would establish a risk-based government sponsored insurance program covering all defined contribution plans.  The program would insure individual account balances up to a certain amount by guaranteeing a minimum retirement benefit based on average investment returns over a fixed period of prior years.  The program would rely on a “prescribed diversification standard” designed to approximate the average rate of return for individual accounts invested in average risk investments over the participant’s working life.  The risk exposure in a participant’s investment allocation would be weighed against the risk of the prescribed diversification standard and insurance premiums would vary based on the degree to which the participant’s account complies with the standard.

The insured benefit would be payable in the form of a single or joint life annuity depending on the participant’s marital status.  No insured benefit distributions would be payable prior to death, disability or the attainment of social security normal retirement age.  Thus the insurance would not cover plan provisions allowing for early distributions including loans.  Insured benefits would not be upwardly adjusted for post-retirement age contributions, but there would be an actuarial adjustment to reflect a delayed annuity start date.