Robert Powell’s Retirement Portfolio: Will this ‘retirement share’ plan replace pensions?

You propose creating something called the Retirement Shares Plan or RSP. What is it and how does it work?

Fuerst: The RSP is very similar to a traditional defined-benefit pension plan. Participants earn benefits for each year of service. Rather than earning a fixed dollar amount each year as in traditional plans, in the RSP participants earn “retirement shares.” These shares vary in value based on the underlying assets. At retirement, each share pays a monthly benefit for life based on the value of the retirement share.

How much would workers contribute to the plan, and what sort of income they could expect to receive from it?

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Participants usually do not contribute to these plans because contributions would be post-tax instead of pretax as in 401(k)s. The plan is generally funded entirely by employer contributions. The level of benefit will depend on both how high the employer sets the contribution level and how the investments perform. A retiree with 30 years of service in a plan might get a benefit of 30% to 50% of final pay.

Why do we need such a plan? What problems does it solve?

First, the RSP solves a significant problem corporations have with traditional defined-benefit plans — the volatile effect on the balance sheet and income statement. The RSP provides a stable, predictable cost with little or no unfunded liability on the balance sheet. Second, the RSP remedies a problem participants have with defined contribution plans — the benefit is paid as lifetime income.

With the RSP, you propose creating a diversified account and a stable value account. Do we not already have that in a way with money market, GICs, stable value and DIAs, as well as diversified accounts? Wouldn’t better investment education and plan design solve the problem you’ve identified?

Yes, diversified accounts and stable value accounts already exist, but they are used mostly in defined-contribution plans. Many defined-contribution plan participants are familiar with funds like these. The RSP would use these funds to back the periodic pension benefits. The monthly pension payments would vary based on the performance of these funds. Currently, pension benefits usually do not vary with the investment return of the funds.

Would the money be invested in variable income annuities and who decides how the money is allocated between the diversified and stable value accounts?

The plan sponsor or trustee would select the investments within the diversified and stable value accounts. Participants benefits would be defaulted to the diversified account, but any participant could elect to transfer all or part of the benefit to the stable account.

There’s quite a bit of resistance to variable annuity plans. What could be done to improve market acceptance?


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