Guaranteed accounts would boost retirement savings

The U.S. is facing a retirement crisis.  Not only are fewer employers offering traditional defined-benefit pension plans but many do not offer a retirement savings plan of any kind.  Census data provided by the Working Poor Families Project shows that six out of ten Colorado workers do not have access to a retirement plan at work either a defined-benefit or a defined-contribution plan.

This makes it difficult for workers to save for retirement, which, in turn, will have a considerable effect on the next generation of Coloradans.

Demos, a non-partisan public policy and research organization, has recently proposed creating State Guaranteed Retirement Accounts as a way to help workers save for retirement. These would be "cash balance" accounts that are a hybrid with similarities to traditional pensions (defined-benefit accounts) and 401(k)-type plans (defined-contribution accounts).

Demos' State Guaranteed Retirement Accounts would have the following features:

  • Consistent contributions – Employees would contribute at least 3 percent of their pay each pay period.
  • Guaranteed returns – Each account would be guaranteed returns of 3 percent,  or 1 percent above inflation, whichever is greater. This would be accomplished by setting aside funds in good years and by buying insurance to cover poor returns.
  • Pooled investments – Funds in the accounts would be invested in one large pool, with an emphasis on low-risk, long-term gains. Thus, economies of scale would reduce investment costs.
  • Portable accounts – Each account would move with the worker as he or she changed jobs within the state.
  • Lifelong retirement income – At retirement, workers would convert most if not all of their funds into an annuity to provide lifelong income.

Demos proposes having state pension funds such as PERA invest the funds in these accounts, although the funds would be separate from public pension fund assets.

These funds are designed to supplement existing 401(k) plans and initially would be open to all full- and part-time private-sector workers. Ultimately, they could be available to all state residents.

Employees would be automatically enrolled but would have the option to drop out of the accounts. Workers would be required to leave funds in their accounts until retirement, at which time they would convert their savings to an annuity.

The cost of running State Guaranteed Retirement Accounts would be paid by the participants.

In October, California enacted legislation to create the Secure Choice Retirement Savings Program. It is similar to the Demos proposal.


Article posted on December 3, 2012