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Retirement Risks Faced by Workers but Pose Trade-offs' which was 
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Report to the Chairman, Committee on Education and Labor, House of 
Representatives: 

United States Government Accountability Office: GAO: 

July 2009: 

Private Pensions: 

Alternative Approaches Could Address Retirement Risks Faced by Workers 
but Pose Trade-offs: 

"This report was revised on September 1, 2009, to correct table 12 on 
page 53, row 1, column 4 - The Baseline results, Household annuity 
equivalent (per year, 2008 dollars) for income quartile 2 should be 
$7,780, instead of $8,943."

GAO-09-642: 

GAO Highlights: 

Highlights of GAO-09-642, a report to the Chairman, Committee on 
Education and Labor, House of Representatives. 

Why GAO Did This Study: 

Recent losses in the stock market and poor economic conditions 
underscore that many U.S. workers are at risk of not having an adequate 
income in retirement from pension plans. The dramatic decline in the 
stock market has diminished pension savings and reportedly led to low 
levels in older Americans’ confidence in their ability to retire. Even 
before the current economic recession, research indicated that pension 
benefits are likely to be inadequate for many Americans. 

This report addresses the following questions: (1) What are key risks 
faced by U.S. workers in accumulating and preserving pension benefits? 
(2) What approaches are used in other countries that could address 
these risks and what trade-offs do they present? (3) What approaches do 
key proposals for alternative plan designs in the U.S. suggest to 
mitigate risks faced by workers and what trade-offs do they entail? 

To complete this work, we reviewed research on defined benefit and 
defined contribution plans, and interviewed pension consulting firms, 
industry experts, academics, and other relevant organizations in the 
U.S. and abroad. In addition, we used a microsimulation model to assess 
the impact of certain strategies to increase pension coverage on 
accumulated benefits. 

The Department of Labor and Department of Treasury provided technical 
comments on this report. 

What GAO Found: 

U.S. workers face a number of risks in both accumulating and preserving 
pension benefits. Specifically, workers may not accumulate sufficient 
retirement income because they are not covered by a defined benefit 
(DB) or defined contribution (DC) pension plan. For example, according 
to national survey data, about half of the workforce was not covered by 
a pension plan in 2008. Furthermore, workers covered by DC plans, in 
particular, risk making inadequate contributions or earning poor 
investment returns, while workers with traditional DB plans risk future 
benefit losses due to a lack of portability if they change jobs. 
Preretirement benefit withdrawals (leakage), high fees, and the 
inappropriate drawdown of benefits in retirement also introduce risks 
related to preserving benefits, especially for workers with DC plans. 

Figure: Key Risks in Accumulating and Preserving Pension Benefits: 

[Refer to PDF for image: illustration] 

Workers' career: 

Accumulation: 
* Lack of coverage; 
* Insufficient contributions; 
* Poor investment returns. 

Preservation: 
* Lack of portability; 
* Leakage; 
* High fees. 

Retirement: 
* Inappropriate drawdown of benefits. 

Sources: GAO analysis; images, Art Explosion. 

[End of figure] 

The private pension systems of the Netherlands, Switzerland, and the 
United Kingdom represent alternative approaches to address these key 
risks, but they also pose trade-offs to consider in applying them in 
the U.S. We selected these countries from a larger group after an 
initial review indicated that their private pension systems addressed 
many of the risks that U.S. workers face and had the potential to yield 
useful lessons for the U.S. experience. Their systems offer ideas for 
mitigating risks in accumulating and preserving benefits, such as 
mandating coverage, sharing investment risk among workers and 
employers, restricting leakage, and using annuities to drawdown 
benefits. However, these approaches pose trade-offs. For example, in 
the Dutch and Swiss systems, sharing investment risk requires assets to 
be pooled and thus limits individual choice. Additionally, while 
annuitizing benefits at retirement can mitigate longevity risk, doing 
so also limits retirees’ access to their assets. 

Several proposals for alternative pension plan designs in the U.S. 
incorporate approaches to mitigate the risks faced by workers, such as 
incentives to increase voluntary coverage or mandating annuitization. 
However, these approaches also pose trade-offs and costs for workers 
and employers, and in some cases the federal government. In particular, 
important trade-offs arise with mandating coverage and contributions, 
guaranteeing investment returns, and annuitizing benefits. For example, 
mandatory approaches reduce risks but also raise concerns about the 
impact of higher benefit costs, particularly on small employers. 

View [hyperlink, http://www.gao.gov/products/GAO-09-642] or key 
components. For more information, contact Barbara Bovbjerg at (202) 
512- 7215 or bovbjergb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

U.S. Workers Face a Number of Risks in Accumulating and Preserving 
Pension Benefits: 

Other Countries' Experiences Offer Alternative Approaches for 
Addressing Risks Faced by U.S. Workers but also Involve Trade-offs: 

Domestic Proposals Incorporate Different Approaches to Reduce 
Retirement Risks to Workers but also Pose Trade-offs: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Examples from Private Sector Pension Systems in the United 
Kingdom, the Netherlands, and Switzerland: 

Appendix III: Summary of Administrative and Legal Changes Associated 
with Key Domestic Proposals: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Obtaining Copies of GAO Reports and Testimony: 

Tables: 

Table 1: Estimated Social Security Replacement Rates for Workers 
Turning 65 in 2009 and in 2055, Percentage of Career-Average Earnings: 

Table 2: Demographic and Economic Data for the United States, 
Netherlands, Switzerland, and the United Kingdom: 

Table 3: Key Factors Affecting Accumulation of Benefits in Common DB 
and DC Plans: 

Table 4: Key Factors That Affect the Preservation of Benefits in Common 
DB and DC Plans: 

Table 5: Private Pension Systems in the Netherlands, Switzerland, and 
the United Kingdom: 

Table 6: Total and Distribution of Contributions to Private Pension 
Plans in the United Kingdom, the Netherlands, and Switzerland, 2009: 

Table 7: Key Domestic Proposals for Alternative Pension Plan Designs: 

Table 8: The Super Simple Saving Plan's Approaches to Coverage and 
Contributions: 

Table 9: The New Benefit Platform for Life Security's Approaches to 
Coverage, Portability, and Investments: 

Table 10: The Universal 401(k) Plan's Approaches to Coverage, 
Contributions, Investments, and the Drawdown of Benefits in Retirement: 

Table 11: The Guaranteed Retirement Accounts Plan's Approaches to 
Coverage, Contributions, Investments, and the Drawdown of Benefits in 
Retirement: 

Table 12: Projected Average Household Annuity Equivalents and Projected 
Percentage of Workers with DC Savings at Retirement, by Income, under 
Different Scenarios: 

Table 13: Projected Average Household Annuity Equivalents and Projected 
Percentage of Workers with DC Savings at Retirement, by Income, under 
Different Scenarios: 

Table 14: Sample Summary Statistics, PENSIM 1990 Cohort, Medians: 

Table 15: Administrative and Legal Changes Associated with Key Domestic 
Proposals for Alternative Pension Plan Designs: 

Figures: 

Figure 1: Sources of Income for Households Aged 65 and Older, 2006: 

Figure 2: Effect of a 1 Percentage Point Higher Annual Fee on a $20,000 
401(k) Balance Invested over 20 years: 

Figure 3: Risk-sharing through Conditional Indexation of DB Pension 
Benefits in the Netherlands: 

Abbreviations: 

DB: defined benefit: 

DC: defined contribution: 

ERISA: Employee Retirement Income Security Act: 

GDP: gross domestic product: 

GRA: guaranteed retirement account: 

IRA: Individual Retirement Account: 

OECD: Organisation for Economic Co-operation and Development: 

PENSIM: Policy Simulation Group Pension Simulator: 

PSG: Policy Simulation Group: 

U.K.: United Kingdom: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

July 24, 2009: 

The Honorable George Miller:
Chairman:
Committee on Education and Labor:
House of Representatives: 

Dear Mr. Chairman: 

Recent losses in the stock market and poor economic conditions 
underscore that many U.S. workers are at risk of not having an adequate 
income in retirement. The dramatic decline in the stock market has 
diminished pension savings, a key component of retirement income, and 
has led to low levels in older Americans' confidence in their ability 
to retire. However, even before the current economic recession, 
research indicated that pension savings are likely to be inadequate for 
many Americans, particularly low-income workers. Over the last two 
decades, much of the risk and burden of financing retirement has 
shifted from employers to employees as pension coverage has moved away 
from traditional defined benefit (DB) plans, in which workers typically 
accrue benefits based on years of service and earnings, in favor of 
defined contribution (DC) plans, in which participants accumulate 
balances in self-directed individual accounts, such as 401(k)s. Yet 
despite the increase in the number of DC plans, a considerable number 
of workers still lack pension coverage through their employer. Even 
many workers who do have a pension may still fall short of sufficient 
pension benefits to maintain their standard of living in retirement due 
to a reliance on the financial health of the employer and other 
factors. This outcome has led some industry experts to conclude that 
the U.S. pension system is in need of new options to address the risks 
workers face in securing an adequate retirement income from pension 
plans.[Footnote 1] 

A number of other countries have made modifications to their private 
pension systems in an attempt to address risks faced by their workers. 
In addition, pension experts and organizations in the United States 
have developed proposals for alternative designs to address some of the 
risks and limitations of employer-based DB and DC pension plans. In 
order to develop strategies to improve the retirement security of 
America's workers, you asked us for information about how alternative 
plan designs address the risks associated with accumulating and 
preserving pension benefits. Specifically, you asked us to answer the 
following questions: 

1. What are key risks faced by U.S. workers in accumulating and 
preserving pension benefits? 

2. What approaches are used in other countries that could address these 
risks and what trade-offs do they present? 

3. What approaches do key proposals for alternative plan designs in the 
U.S. suggest to mitigate risks faced by workers and what trade-offs do 
they entail? 

To identify key risks faced by workers from traditional DB and DC 
plans, we reviewed research and interviewed industry experts, pension 
consulting firms, academics, and other relevant organizations. The 
scope of this study is limited to risks faced by workers directly 
related to their pension benefits and does not focus on other 
significant but more indirect risks to retirement security, such as the 
loss of retiree health care coverage, rising Medicare premiums, or 
higher-than-expected health care costs in retirement. To identify 
approaches used in other countries that could address risks in the U.S. 
pension system, we examined the employer-sponsored pension systems of 
three countries: the Netherlands, Switzerland, and the United Kingdom 
(UK). We selected these countries after an initial review of employer- 
sponsored pension plans in countries that belong to the Organisation 
for Economic Co-operation and Development (OECD). In that review, we 
assessed each country's pension system based on the risks identified in 
the first objective and the potential for yielding useful lessons for 
the U.S. experience. For each of the three selected countries, we 
reviewed available documentation and research and analyzed the plan 
designs based on the risks workers face. We interviewed pension experts 
and government officials in each country, as well as academics and 
other experts based in the United States, about each plan's strengths, 
weaknesses, trade-offs, and lessons learned for the U.S. To identify 
the key proposals for alternative pension plan design in the United 
States, we reviewed available documentation and interviewed national 
retirement policy experts. We selected four proposals that incorporate 
strategies to address risks workers face, were developed in enough 
detail to allow us to fully analyze them, were not duplicative, and 
have been proposed or considered in the last 5 years. In addition, we 
assessed two other proposals that specifically focused on increasing 
the use of annuities in DC plans. We reviewed each proposal and 
interviewed their authors to evaluate the strengths, weaknesses, and 
trade-offs of each proposal, as well as the legal or institutional 
changes they would require. We also reviewed related research and 
interviewed pension experts about the approaches used in the proposals. 
In addition, we used a microsimulation model, PENSIM, to assess the 
impact of certain strategies, including requiring all employers that do 
not currently offer a pension plan to sponsor a DC plan with no 
employer contribution (i.e., universal access), on accumulated 
benefits.[Footnote 2] These strategies are used in some of the 
proposals we reviewed, but do not represent any proposal in its 
entirety. PENSIM has been used by GAO, the Department of Labor, other 
government agencies, and private organizations to analyze lifetime 
coverage and adequacy issues related to employer-sponsored pensions in 
the United States[Footnote 3] For additional information on the 
methodology used for this review, see appendix I. 

We conducted this performance audit from August 2008 to July 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

Pension plans offered by private employers in the United States operate 
in a voluntary system with tax incentives for workers to participate in 
plans that employers offer. Employers may choose to offer different 
types of plans which fall into two broad categories: defined benefit 
(DB) and defined contribution (DC). A DB plan is generally financed by 
the employer and typically provides retirement benefits in the form of 
an annuity that provides a guaranteed monthly payment for life, the 
value of which is determined by a formula based on salary and years of 
service.[Footnote 4] DB plans can include hybrid plans, such as cash 
balance plans.[Footnote 5] In a DC plan workers and/or employers make 
contributions into individual accounts set up for each participant. 
Most DC plans allow participants to direct these contributions to 
mutual funds and other financial market investments to accumulate 
pension benefits, dependent on net investment returns, which will then 
be withdrawn during retirement. Over the last two decades, the number 
of DB plans has declined substantially while the number of DC plans has 
increased. In 2007, about half of private sector workers participated 
in employer-sponsored pension plans; 21 million had a DB plan and more 
than 40 million had a DC plan. 

Research suggests that retirement income from pension plans is likely 
to be inadequate for many workers in the United States. In recent 
years, a considerable number of DB plans have been terminated or closed 
to new participants, which prevents workers from accruing further 
benefits in those plans in most cases. For those with DC plans, data 
gathered before the recent financial crisis indicate that many workers 
have low balances.[Footnote 6] One study found that in 2007, median 
combined balances in 401(k) plans and Individual Retirement Accounts 
(IRA) were only $78,000 for individuals aged 55 to 64.[Footnote 7] In 
the past year, poor investment returns have led to considerable losses 
in many workers' DC plans, leaving them at an even greater risk for 
having inadequate savings for retirement. 

In addition to pension plans, retirees depend on other sources of 
income in retirement. Social Security benefits provide the largest 
source of retirement benefits for most households. In 2006, Social 
Security benefits provided almost 37 percent of total income compared 
to 18 percent provided by pension income in households with someone 
aged 65 or older, excluding nonannuitized payments or lump-sum 
withdrawals.[Footnote 8] As seen in figure 1, income from other 
sources, such as asset income (e.g., interest and dividends) and 
earnings from working during retirement, are also important for 
households aged 65 and older.[Footnote 9] 

Figure 1: Sources of Income for Households Aged 65 and Older, 2006: 

[Refer to PDF for image: pie-chart] 

Social Security: 37%; 
Employment earnings: 27%; 
Pension income: 18%; 
Income from assets: 15%; 
Cash public assistance: 1%; 
Other: 2%. 

Source: U.S. Social Security Administration, Office of Retirement and 
Disability Policy Income of the Population 55 or Older, 2006. 

Note: Data reported by the Social Security Administration for pension 
income includes regular payments from IRAs, Keogh, or 401(k) plans. 
Nonregular (nonannuitized or lump-sum) withdrawals from IRA, Keogh, and 
401(k) plans are not included as income. 

[End of figure] 

There is little consensus about how much constitutes "enough" savings 
for retirement. Retirement income adequacy may be defined relative to a 
standard of minimum needs, such as the poverty rate, or to the level of 
spending households experienced during working years. Some economists 
and financial advisors consider retirement income adequate if the ratio 
of retirement income to preretirement income--called the replacement 
rate--is between 65 percent and 85 percent.[Footnote 10] Retirees may 
not need to replace 100 percent of preretirement income to maintain 
living standards for several reasons. For example, retirees will no 
longer need to save for retirement and their payroll and income tax 
liability will likely fall. However, some researchers cite 
uncertainties about future health care costs and future Social Security 
benefit levels as reasons to suggest a higher replacement rate may be 
necessary.[Footnote 11] Table 1 shows estimated replacement rates from 
Social Security benefits for low and high earners who retire in 2009 
and 2055, as well as the remaining amount of preretirement income 
necessary to achieve a 75 percent replacement rate.[Footnote 12] 

Table 1: Estimated Social Security Replacement Rates for Workers 
Turning 65 in 2009 and in 2055, Percentage of Career-Average Earnings: 

Source of replacement rate income: Social Security; 
Year in which a 65-year-old retires: 2009: Low earners' replacement rate: 54.0; 
Year in which a 65-year-old retires: 2009: High earners' replacement rate: 33.2; 
Year in which a 65-year-old retires: 2055: Low earners' replacement rate: 49.0; 
Year in which a 65-year-old retires: 2055: High earners' replacement rate: 30.1. 

Source of replacement rate income: Replacement rate from other sources 
to achieve 75 percent replacement rate; 
Year in which a 65-year-old retires: 2009: Low earners' replacement rate: 21.0; 
Year in which a 65-year-old retires: 2009: High earners' replacement 
rate: 41.8; 
Year in which a 65-year-old retires: 2055: Low earners' replacement 
rate: 26.0; 
Year in which a 65-year-old retires: 2055: High earners' replacement 
rate: 44.9. 

Source: The 2009 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Federal Disability Insurance Trust 
Funds. Table VI.F10. 

Note: Based on scheduled benefits under intermediate assumptions of 
Social Security projections. Replacement rates represent benefits as a 
percentage of career-average earnings for low and high earners. A "low 
earner" is someone whose career average earnings are about 45 percent 
of the national average wage index (AWI), while a "high earner" has 
career average earnings of about 160 percent of AWI. Estimated benefits 
based on intermediate Social Security Trust Fund assumptions. The AWI 
in 2009 is $42,041.84. 

[End of table] 

These figures give rough guidelines for how much income retirees may 
need from sources other than Social Security, such as employer- 
sponsored pensions and personal savings. In 2007, we reported that DC 
plans could, on average, replace about 22 percent of annualized career 
earnings at retirement, but these projected replacement rates vary 
widely across income groups with many low-income workers having little 
or no pension plan savings at retirement.[Footnote 13] In an effort to 
increase personal savings for retirement, the President's 2010 budget 
includes a proposal targeted at workers who are not covered by an 
employer-sponsored pension plan.[Footnote 14] Under this proposal, 
employers who sponsor a pension plan but exclude some portion of their 
employees from it would be required to automatically enroll the 
excluded workers into an IRA. However, the proposal does not mandate 
employer contributions. 

Other countries share some of the same risks faced by their own workers 
in saving for retirement. The Netherlands, Switzerland, the United 
Kingdom, and the United States each have extensive private pension 
systems. However, in drawing comparisons between countries, it is 
important to recognize social and economic differences. As seen in 
table 2, compared to the United States, each of these countries has a 
smaller population with a higher share of individuals aged 65 and 
older. In addition, the size of each country's economy is smaller than 
that of the United States as measured by the per capita gross domestic 
product (GDP). While the economies of the Netherlands, Switzerland, and 
the United Kingdom can be characterized as market based, they generally 
include more extensive and generous social welfare provisions than that 
of the United States. 

Table 2: Demographic and Economic Data for the United States, 
Netherlands, Switzerland, and the United Kingdom: 

United States; 
Population: 2007: 301,621,000; 
GDP per capita: 2007: $45,489; 
Ratio of population aged 65 and older to total population: 2007: 12.6; 
Ratio of population aged 65 and older to total population: 2030: 19.7. 

Netherlands; 
Population: 2007: 16,381,000; 
GDP per capita: 2007: $39,225; 
Ratio of population aged 65 and older to total population: 2007: 14.6; 
Ratio of population aged 65 and older to total population: 2030: 23.4. 

Switzerland; 
Population: 2007: 7,550,000; 
GDP per capita: 2007: $41,102; 
Ratio of population aged 65 and older to total population: 2007: 16.3; 
Ratio of population aged 65 and older to total population: 2030: 23.9. 

United Kingdom; 
Population: 2007: 60,975,000; 
GDP per capita: 2007: $35,669; 
Ratio of population aged 65 and older to total population: 2007: 16.0; 
Ratio of population aged 65 and older to total population: 2030: 21.9. 

Source: OECD Country Statistical Profile. Data extracted on May 11, 
2009, from OECD Stat. [hyperlink, 
http://stats.oecd.org/WBOS/Index.aspx?DataSetCode=CSP2009]. 

Note: GDP per capita is based on purchasing power parity, which 
equalizes the purchasing power of different currencies in their home 
countries by taking into account the relative cost of living and the 
inflation rates of different countries, rather than just a nominal GDP 
comparison. 

[End of table] 

The private pension systems in the Netherlands, Switzerland, and the 
United Kingdom are designed to replace an adequate amount of income 
during retirement for the majority of the population. Key features of 
each country's system include the following: 

* In the Netherlands, more than 90 percent of the workforce is covered 
by a private pension. Pension plans may be provided by individual 
employers or entire industries, either directly or though insurance 
providers. Most pension plans are DB plans, although since the early 
2000s, almost all have changed from traditional final average pay DB 
plans to career average DB plans.[Footnote 15] Private pensions are 
intended to supplement public pension benefits provided by the 
government, and together the goal of these two components is to replace 
70 percent of preretirement earnings. 

* In Switzerland, private pension plans cover over 90 percent of the 
workforce. Most pensions are DB plans, which use a cash balance 
formula. Plans can be offered by individual employers or a group of 
employers in an industry or locality, either directly or through an 
insurance provider. The public and private pension systems are 
integrated, and the overall goal of the two components is to replace 60 
percent of preretirement earnings. 

* In the United Kingdom, the private pension system currently covers 
approximately 33 percent of the workforce. Similar to the United 
States, most plans in the United Kingdom are DC plans. The United 
Kingdom has enacted major public and private pension reforms in recent 
years that are intended to increase retirement saving among low-and 
middle-income workers. Reforms intended to expand the private pension 
system to ensure a minimum standard of living in retirement for most 
workers are scheduled go into effect in 2012. Although some of the 
details of the new system are currently under development, officials in 
the United Kingdom told us that the median earner's retirement income 
from the public and private pensions combined is expected to replace 45 
percent of preretirement earnings.[Footnote 16] 

U.S. Workers Face a Number of Risks in Accumulating and Preserving 
Pension Benefits: 

Workers Face Risks Accumulating Pension Benefits Related to Coverage, 
Contributions, and Investment Returns: 

In securing an adequate income for retirement, workers face risks due 
to several factors that determine the amount of pension benefits 
accumulated. Workers may not accumulate sufficient benefits due to lack 
of pension coverage and inadequate contributions, as well as poor 
investment returns. 

Coverage: 

Many workers face the risk of not accumulating sufficient retirement 
income from pension plans because they lack consistent coverage 
throughout their career. Everything else equal, fewer years of plan 
coverage reduce the amount of pension benefits accumulated for 
retirement. According to March 2008 data from the National Compensation 
Survey (NCS), 49 percent of the private sector workforce was not 
covered by a pension plan.[Footnote 17] Coverage rates tend to be lower 
for part-time and low-income workers and those employed at small firms. 
For example, NCS data indicate that 60 percent of full-time workers 
were covered by a plan compared to only 23 percent of part-time 
workers. Similarly, 76 percent of those who work for an employer with 
500 workers or more were covered by a plan compared to 34 percent of 
those who work for an employer with less than 50 workers. 

Whether or not a worker is covered by a pension plan depends on both 
access and participation. For workers to have access to a plan, their 
employer must sponsor a plan and workers must be eligible under the 
plan's rules.[Footnote 18] Access to a plan is lower among part-time 
and low-income workers, and those who are employed at small firms. 
Participation features, though, vary for DB and DC plans (see table 3). 
While all eligible workers participate in a DB plan, workers may decide 
not to participate in DC plan. Thus, for workers who have access to a 
DC plan, coverage is also dependent on whether a worker participates. 
One study reports that 56 percent of private sector workers had access 
to a DC plan in 2006 but only about 40 percent participated.[Footnote 
19] Younger workers and low-income workers are less likely to choose to 
participate in a DC plan. Several experts we interviewed noted that 
automatic enrollment, which a growing number of DC plans have adopted, 
has been shown to increase participation because workers are required 
to opt out of, rather than opt into, their plan. Thus, if a worker 
fails to make an active decision about participating in the plan, under 
automatic enrollment he or she will participate by default. The long- 
term effect of automatic enrollment, however, has yet to be 
determined.[Footnote 20] 

Table 3: Key Factors Affecting Accumulation of Benefits in Common DB 
and DC Plans: 

Coverage; 
DB plan--final average pay: Voluntary for employers to sponsor a plan; 
all eligible workers generally participate in the plan; 
DC plan--401(k): Voluntary for employers to sponsor a plan; voluntary 
for workers to participate. 

Contributions; 
DB plan--final average pay: Generally financed by the employer; 
DC plan--401(k): Worker and/or employer may provide contributions. 

Investment; 
DB plan--final average pay: Assets are centrally managed; investment 
risk is borne by the employer; benefits are insured up to certain 
limits by the Pension Benefit Guaranty Corporation; 
DC plan--401(k): Assets are generally self-directed by the worker 
(among options made available by the plan); investment risk is borne 
by the worker; benefits are not insured by the Pension Benefit Guaranty 
Corporation. 

Source: GAO analysis. 

[End of table] 

Contributions: 

Workers may also fail to accumulate sufficient pension benefits due to 
inadequate contributions. As a result of the transition to DC plans, 
workers increasingly bear the responsibility for making contributions 
to their plans. In a DB plan, contributions are generally financed 
exclusively by the employer and benefits are determined by a formula 
based on years of service and earnings. However, in a DC plan, 
contributions can be made by the worker, employer, or both, and the 
amount of the benefit depends on the amount of contributions made and 
net investment returns. Estimates vary for a target contribution rate 
to achieve adequate retirement income from a DC plan. Pension experts 
we interviewed cited target contribution rates of between 12 and 20 
percent of pay. Research suggests that contributions to DC plans for 
many workers are less. For example, according to a study by an 
investment management firm which manages a large number of DC plans, 
the majority of contributions are made by workers, not employers, and 
the median worker contribution in 2007 was 6 percent among plans 
managed by this firm.[Footnote 21] Employers can make either matching 
or nonmatching contributions to a DC plan.[Footnote 22] The same study 
indicates that, among DC plans managed by this firm, most employers who 
sponsor DC plans provide matching contributions, with a median employer 
match of 3 percent in 2007. Since 2007, under deteriorating economic 
conditions, many employers have suspended or reduced their 
contributions to DC plans. In a DB plan, on the other hand, the 
employer bears the responsibility of making contributions and may 
decide to terminate or freeze the plan to lessen the need to make 
future contributions, which also would reduce the amount of pension 
benefits a worker accumulates for retirement. Moreover, several experts 
we interviewed said that it is important to combine automatic 
enrollment in DC plans with automatic escalation of contributions. 
Without automatic escalation of contribution rates, automatic 
enrollment may lead to insufficient retirement income because employers 
may set a low default contribution rate for workers, such as 3 percent 
or less, and many workers who participate remain at the default level. 

Investment: 

Workers face additional risks related to investment returns and asset 
allocation decisions in accumulating pension benefits. In a DC plan, 
the employer must provide participants with a range of investment 
options. Workers are responsible for allocating their funds among those 
options and individually bear the investment risks. If investments do 
not perform as well as expected, workers will have less money in their 
DC plans to provide income in retirement. In a DB plan, on the other 
hand, employers are responsible for making investment decisions and 
bear the investment risks. Several experts we interviewed said workers 
who participate in a DC plan may make poor investment decisions. For 
example, standard financial theory recommends that workers shift their 
investments from riskier assets, such as stocks, to more stable assets, 
such as bonds, as they near retirement. However, research shows that 
many older workers still have high stock allocations. For example, one 
study shows that nearly 1 in 4 individuals between the ages of 56 and 
64 had more than 90 percent of their 401(k) account balance invested in 
stocks at the end of 2007.[Footnote 23] A sharp drop in the stock 
market, such as the 37 percent fall in the S&P 500 in 2008, is of 
particular concern for older workers heavily invested in stocks because 
they may lack enough years before retirement to recoup their losses. 
Overall, from October 2007 to October 2008, the value of stocks held in 
401(k)s and IRAs reportedly fell by about $2 trillion.[Footnote 24] In 
addition, several experts we interviewed noted that DC participants may 
also increase their exposure by investing in employer stock. Investing 
in employer stock poses additional risk because if the employer does 
not perform well, the value of the employer's stock may fall and 
layoffs ensue. Thus, workers may lose their jobs at the same time the 
value of their pension benefit declines. One study by an investment 
management firm, which manages a large number of DC plans, found that 
in 2006, 59 percent of DC participants were in plans that allow 
investment in employer stock.[Footnote 25] Among these plans, 21 
percent of participants' total assets were invested in employer stock. 
In addition, two experts we interviewed said that DB plans invest more 
successfully than some workers in DC plans because they are 
professionally managed. However, DB plans are not immune from declining 
investment returns. For example, declining investment returns can 
reduce a plan's funding level, requiring additional contributions from 
the employer. At the same time, poor economic conditions may make it 
financially difficult for the employer to make those contributions and 
could ultimately cause the employer to terminate or freeze their plan. 
In the event that an employer terminates a DB plan with insufficient 
assets to pay workers the pension benefit they are entitled to, a 
federal insurance program administered by the Pension Benefit Guaranty 
Corporation provides protection up to certain limits for qualified 
plans.[Footnote 26] Nevertheless, in a DB plan, low investment returns 
do not directly lower a worker's benefits. 

Workers Face Risks Preserving Pension Benefits Related to Portability, 
Leakage, Fees, and the Drawdown of Benefits in Retirement: 

Workers also face risks in preserving their pension benefits for 
retirement. The amount of pension benefits may be reduced due to a lack 
of portability when workers change jobs, particularly in DB plans, and 
preretirement benefit withdrawals (i.e., leakage), particularly in DC 
plans.[Footnote 27] In addition, workers with DC plans may have the 
value of their benefits eroded by high fees, which reduce net 
investment returns. Moreover, workers face several risks when drawing 
down their benefits during retirement, including whether their benefits 
last a lifetime, how well their investments perform, and how their 
savings weather inflation. 

Portability: 

The pension benefits available for retirement may be lower for workers 
who change jobs if pension benefits are not fully portable. 
Specifically, risks arise in final pay DB plans because workers 
changing jobs may incur future lifetime benefit losses in that their 
benefits would be lower compared to the benefits they would have 
accrued by remaining with their current employer until retirement. 
[Footnote 28] As the example in the box below illustrates, when a 
worker with a final pay DB plan changes jobs, she may lose credit for 
past service that will reduce the amount of her annual pension benefit 
in retirement. 

[Text box: The Impact of Changing Jobs in a Final Average Pay DB Plan; 
In a DB plan with a formula based on final average pay, a worker who 
changes jobs and DB plans can accrue lower benefits compared to a 
worker who stays in the same plan. For example, a final average pay 
formula might determine monthly benefits payable at retirement on the 
basis of 1.25 percent multiplied by years of service completed 
multiplied by the worker's average salary over the last 5 years of 
service. Compared to a worker who stays in the same plan for a 25-year 
period, a worker who changes plans part-way through her 25-year career 
accrues a lower benefit. 

Scenario 1: A worker is in the same DB plan for 25 years; 1.25% x 25 
years of service x $65,000 (average of employee's final 5 years' annual 
salaries) = $20,313; Annual benefit from DB plan = $20,313. 

Scenario 2: A worker is in two identical DB plans for 25 years, with a 
job change after 15 years; 1.25% x 15 years of service x $35,000 
(average of employee's final 5 years' annual salaries) = $6,563; 1.25% 
x 10 years of service x $65,000 (average of employee's final five 
years' annual salaries) = $8,125; Annual benefit from both DB plans = 
$14,688. 

Note: In scenario two we assume that the worker is always covered by an 
identical plan that has the same features as the worker's current plan. 
The worker loses no benefits because she has met the plans' vesting 
requirements. End text box] 

Table 4: Key Factors That Affect the Preservation of Benefits in Common 
DB and DC Plans: 

Portability; 
DB plan--final average pay: Worker is entitled to vested benefits; the 
benefits and service credits generally are not transferable if the 
worker changes jobs and are not adjusted for inflation; 
DC plan--401(k): Worker is entitled to vested benefits; the account balance 
may be transferred if the worker changes jobs. 

Leakage; 
DB plan--final average pay: Early access to benefits may be permitted 
in some cases; 
DC plan--401(k): Plan may allow workers to take a loan or hardship 
withdrawal prior to retirement. In addition, workers may take an early 
distribution when separating from their employer and not roll it over 
into another plan or IRA. Early distributions that are not rolled over 
are generally subject to a 10 percent excise tax and regular income 
tax. 

Fees; 
DB plan--final average pay: Administrative and investment fees are paid 
by the employer; 
DC plan--401(k): Investment fees are usually paid by workers; 
administrative fees are often paid by employers, but workers bear them 
in a growing number of plans. 

Drawdown; 
DB plan--final average pay: Workers who receive lump-sum distributions 
must decide how to withdraw their benefits[A]; 
DC plan--401(k): Workers decide how to withdraw their lump-sum benefit[B]. 

Source: GAO analysis. 

[A] In most traditional final average pay plans, benefits are typically 
distributed as annuities and are not adjusted for inflation. 

[B] Most DC plans do not offer an annuity option. 

[End of table] 

Leakage: 

Several forms of preretirement benefit leakage can also reduce the 
income workers receive from pension benefits in retirement. For 
example, in a DC plan, workers may be able to access their account 
prior to retirement by taking a loan or hardship withdrawal, or 
requesting a lump-sum distribution when leaving a job (i.e., 
"cashout").[Footnote 29] Over the long term, early withdrawals of 
retirement savings can adversely affect a worker's preparedness for 
retirement, especially when withdrawn funds are consumed and not 
replaced. Several experts we interviewed cited cashouts, in particular, 
as a significant form of leakage that can pose risks to workers' 
retirement security. Workers with a DC plan may cash out their account 
balances when separating from an employer by requesting a lump-sum 
payment of their total account balance, or some portion of it, rather 
than keeping their accumulated savings in the plan or rolling it into 
another DC plan or IRA.[Footnote 30] If the worker chooses to receive 
their account balance as a cashout, the distribution is generally 
subject to income taxes and a 10 percent excise tax.[Footnote 31] 
According to a study by an investment management firm which manages a 
large number of DC plans, about 28 percent of workers leaving their 
employer in 2007 took their distribution as a cashout and another 2 
percent split their distribution between saving and a cashout rather 
than preserving it for retirement.[Footnote 32] Workers with a DB plan 
may in some cases be allowed to gain access to their benefits prior to 
retirement. For example, some DB plans may provide a lump-sum 
distribution when workers leave their jobs.[Footnote 33] Similar to a 
DC plan, if this distribution is not rolled into a new employer's plan 
or IRA, the amount of benefits available for retirement may be reduced. 
[Footnote 34] 

Administrative and Investment Fees: 

In addition, the pension benefits available for retirement can be 
eroded by high administrative and investment fees. While fees are paid 
by the employer in a DB plan, workers often bear the cost in a DC plan. 
[Footnote 35] Over the course of a worker's career, fees may 
significantly decrease retirement savings by lowering the net 
investment returns. For example, a 1 percentage point difference in 
fees can substantially reduce the amount of money saved for retirement 
(see figure 2). Investment fees, which are charged by companies 
managing mutual funds and other investment products for services 
provided in operating the fund, comprise the majority of fees in 401(k) 
plans and are typically borne by workers. Administrative fees, which 
cover the cost of various administrative activities carried out to 
maintain participant accounts, generally account for the next largest 
portion of plan fees. Although employers often pay the administrative 
fees, workers bear them in a growing number of plans. Several experts 
we interviewed also said it is difficult for workers to understand the 
amount and impact of fees on their DC plans. As we reported in 2007, 
the fee information employers are required to disclose is limited and 
does not provide workers with easy comparisons between fees charged for 
different investment options. 

Figure 2: Effect of a 1 Percentage Point Higher Annual Fee on a $20,000 
401(k) Balance Invested over 20 years: 

[Refer to PDF for image: multiple line graph] 

Year 1: 
Accumulated account balance with .5 percent charge for fees: $21,300; 
Accumulated account balance with 1.5 percent charge for fees: $21,100. 

Year: 2; 
Accumulated account balance with .5 percent charge for fees: $22,685; 
Accumulated account balance with 1.5 percent charge for fees: $22,261. 

Year: 3; 
Accumulated account balance with .5 percent charge for fees: $24,159; 
Accumulated account balance with 1.5 percent charge for fees: $23,485. 

Year: 4; 
Accumulated account balance with .5 percent charge for fees: $25,729; 
Accumulated account balance with 1.5 percent charge for fees: $24,776. 

Year: 5; 
Accumulated account balance with .5 percent charge for fees: $27,402; 
Accumulated account balance with 1.5 percent charge for fees: $26,139. 

Year: 6; 
Accumulated account balance with .5 percent charge for fees: $29,183; 
Accumulated account balance with 1.5 percent charge for fees: $27,577. 

Year: 7; 
Accumulated account balance with .5 percent charge for fees: $31,080; 
Accumulated account balance with 1.5 percent charge for fees: $29,094. 

Year: 8; 
Accumulated account balance with .5 percent charge for fees: $33,100; 
Accumulated account balance with 1.5 percent charge for fees: $30,694. 

Year: 9; 
Accumulated account balance with .5 percent charge for fees: $35,251; 
Accumulated account balance with 1.5 percent charge for fees: $32,382. 

Year: 10; 
Accumulated account balance with .5 percent charge for fees: $37,543; 
Accumulated account balance with 1.5 percent charge for fees: $34,163. 

Year: 11; 
Accumulated account balance with .5 percent charge for fees: $39,983; 
Accumulated account balance with 1.5 percent charge for fees: $36,042. 

Year: 12; 
Accumulated account balance with .5 percent charge for fees: $42,582; 
Accumulated account balance with 1.5 percent charge for fees: $38,024. 

Year: 13; 
Accumulated account balance with .5 percent charge for fees: $45,350; 
Accumulated account balance with 1.5 percent charge for fees: $40,115. 

Year: 14; 
Accumulated account balance with .5 percent charge for fees: $48,297; 
Accumulated account balance with 1.5 percent charge for fees: $42,322. 

Year: 15; 
Accumulated account balance with .5 percent charge for fees: $51,437; 
Accumulated account balance with 1.5 percent charge for fees: $44,650. 

Year: 16; 
Accumulated account balance with .5 percent charge for fees: $54,780; 
Accumulated account balance with 1.5 percent charge for fees: $47,105. 

Year: 17; 
Accumulated account balance with .5 percent charge for fees: $58,341; 
Accumulated account balance with 1.5 percent charge for fees: $49,696. 

Year: 18; 
Accumulated account balance with .5 percent charge for fees: $62,133; 
Accumulated account balance with 1.5 percent charge for fees: $52,429. 

Year: 19; 
Accumulated account balance with .5 percent charge for fees: $66,172; 
Accumulated account balance with 1.5 percent charge for fees: $55,313. 

Year: 20; 
Accumulated account balance with .5 percent charge for fees: $70,473; 
Accumulated account balance with 1.5 percent charge for fees: $58,355. 

[End of figure] 

Drawdown of Benefits during Retirement: 

Once they retire, employers distribute retirement benefits to eligible 
participants according to the provisions of the plan. In DB plans, 
employers typically distribute benefits as an annuity, although lump- 
sum distributions may be allowed. In DC plans employers typically 
distribute benefits as a lump sum, and DC plans generally do not offer 
an annuity payout option. Workers that receive lump-sum distributions, 
in particular, face several risks related to how they withdraw, or 
"draw down" their benefits, including: 

* Longevity risk--retirees may drawdown benefits too quickly and 
outlive their assets. Conversely, retirees may drawdown their benefits 
too slowly, unnecessarily reduce their consumption, and leave more 
wealth than intended when they die. 

* Investment risk--assets in which pension savings are invested may 
decline in value. 

* Inflation risk--inflation may diminish the purchasing power of a 
retiree's pension benefits. 

As noted above, the extent to which retirees face these risks depends 
on how their benefits are distributed in retirement. For example, 
pension benefits may be distributed as a lump-sum and invested in 
assets that can be gradually drawn down over the course of retirement. 
In this case, retirees must decide how to invest their assets and face 
the risk that their investments will decline in value--investment risk-
-and thus not provide sufficient income. In addition, retirees may live 
longer than expected--longevity risk--and exhaust their account 
balances. If, instead, retirees die earlier than expected, they may 
leave much of their benefit unspent. Alternatively, benefits could be 
received in the form of an annuity--a series of monthly payments for 
the remainder of a retiree's life. An annuity mitigates the risk that 
retirees will outlive their assets. However, if the annuity is not 
adjusted for inflation, retirees still face the risk that purchasing 
power will be eroded if inflation rises--inflation risk. 

In DC plans, the pension benefit is available as a lump-sum and 
retirees must decide how to draw down their account to finance 
retirement, for example through gradual withdrawals or by purchasing an 
annuity in which set payments are generally made for the rest of the 
retirees' lives. However, annuities are generally not offered as an 
option in DC plans. According to one study, estimates suggest that 
about one-fifth or less of DC plans offer an annuity option.[Footnote 
36] While retirees could purchase an annuity on the private market, 
several experts we interviewed indicated that one of the reasons this 
option is not widely used is that it is more expensive when purchased 
by individuals than by a group. DB plans, on the other hand, provide 
group access and are legally required to offer a benefit payout in the 
form of an annuity. However, most DB plans do not adjust benefit 
payments for inflation, so a retiree still faces the risk that their 
purchasing power will erode if inflation rises. While DB plans are 
required to offer benefits in the form of an annuity, many DB plans 
also offer workers the option of taking benefits as a lump-sum. One 
study found that when offered a lump-sum distribution the majority of 
DB participants chose this option over an annuity.[Footnote 37] 

Other Countries' Experiences Offer Alternative Approaches for 
Addressing Risks Faced by U.S. Workers but also Involve Trade-offs: 

The private pension systems in the Netherlands, Switzerland, and the 
United Kingdom provide alternative approaches to address the primary 
risks faced by U.S. workers, although there are important trade-offs to 
consider in applying these approaches in the United States.[Footnote 
38] These countries' systems offer ideas for mitigating risks in 
accumulating or preserving benefits, such as using mandates to increase 
coverage, facilitating portability, and the widespread use of annuities 
to drawdown benefits (see table 5). In addition, the Netherlands' and 
Switzerland's systems spread investment and longevity risks amongst 
workers and retirees as a group so that no single individual risks 
losing a significant portion of their benefits or outliving their 
resources. In taking steps to reduce risks for workers, however, these 
countries' private pension systems also pose trade-offs. For example, 
the United Kingdom's recent reform plan requiring employers to 
automatically enroll workers in and contribute to pension plans will 
increase costs for some employers and workers. Further information 
about each country's private pension system is provided in appendix II. 

Table 5: Private Pension Systems in the Netherlands, Switzerland, and 
the United Kingdom: 

Key features: Accumulation; Coverage; (% of workforce covered); 
Netherlands: Predominant plan type: DB (career average): Mandatory for 
most employers and workers[A]; 
Switzerland: Predominant plan type: DB (cash balance): Mandatory; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: 
Mandatory access with automatic enrollment. 

Key features: Accumulation; Contributions; (% of a worker's total 
salary); 
Netherlands: Predominant plan type: DB (career average): >90%; 
Employers - 7% - 19%; 
Workers - 3% - 8%; 
Switzerland: Predominant plan type: DB (cash balance): >90%; 
Employers - 3.5% - 9%; 
Workers - 3.5% - 9%; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: 75% 
(projected)[D]; 
Employers - 3%; 
Workers - 4%; 
Government - 1%. 

Key features: Accumulation; Investment; 
Netherlands: Predominant plan 
type: DB (career average): Assets pooled into pension funds managed by 
boards with employer and worker representation; Workers' benefit 
accruals and retirees' benefits in payment indexed (adjusted in line 
with price/wage growth) conditional on fund's financial solvency; 
Switzerland: Predominant plan type: DB (cash balance): Assets pooled 
into pension funds managed by boards with employer and worker 
representation; Guaranteed minimum 2% rate of return;[B]; retirees' 
benefits in payment indexed (adjusted in line with price/wage growth) 
conditional on fund's financial solvency; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: 
Individually managed by workers; Limited fund options, default investment 
allocation. 

Key features: Preservation; Portability; 
Netherlands: Predominant plan type: DB (career average): Full; 
Switzerland: Predominant plan type: DB (cash balance): Full; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: Full. 

Key features: Preservation; Leakage; 
Netherlands: Predominant plan type: DB (career average): Not allowed; 
Switzerland: Predominant plan type: DB (cash balance): Allowed for 
specific reasons; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: Not 
allowed. 

Key features: Preservation; Fees; 
Netherlands: Predominant plan type: DB (career average): No explicit 
limit; vary; 
Switzerland: Predominant plan type: DB (cash balance): No explicit 
limit; vary; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: 
Target of 0.5% of plan assets. 

Key features: Preservation; Drawdown of benefits; 
Netherlands: Predominant plan type: DB (career average): Mandatory 
annuitization except for small account balances; 
Switzerland: Predominant plan type: DB (cash balance): Most pension 
funds provide annuities; Minimum 25% lump-sum option must be offered; 
United Kingdom: Predominant plan type: DC (Personal Accounts)[C]: 
Mandatory annuitization except for small account balances; Maximum 25% 
lump-sum allowed. 

Source: Discussions with officials in the Netherlands, Switzerland, and 
the United Kingdom, and examination of materials about employer- 
sponsored plans in those countries. 

[A] Officials in the Netherlands told us there is no statutory 
obligation for employers to offer a pension plan but the government has 
mandated pension coverage in most industries at the request of employer 
and employee representatives. 

[B] Officials in Switzerland told us this rate has decreased gradually 
over time from a high of 4 percent in 1998-2002 due to lower market 
investment returns. 

[C] Officials in the United Kingdom are currently developing some of 
the details for the new Personal Accounts system, scheduled to go into 
effect in 2012. 

[D] 75 percent coverage rate represents the total percentage of private 
pension coverage, according to officials. Officials expect that 
Personal Accounts, once fully implemented, will cover about 30 percent 
to 40 percent of the workforce. 

[End of table] 

Some Level of Mandate Is Effective in Achieving Increased Rates of 
Coverage or Contributions: 

Private pension systems in the Netherlands, Switzerland, and the United 
Kingdom demonstrate that different types of mandatory approaches can be 
used to increase coverage or contributions. 

Coverage: 

The Netherlands and Switzerland use different forms of a mandate that 
result in nearly universal coverage. In the Netherlands, officials told 
us that even though there is no statutory requirement for all employers 
to offer a pension plan, private pension coverage is mandatory for many 
employers and workers at the industry level. For participation in an 
industry-wide pension plan to be declared mandatory, employer and 
worker organizations, as social partners, must petition the government 
to extend a mandate.[Footnote 39] As a result, employers and all 
eligible workers in most industries are required to participate in a 
pension plan. Over 90 percent of workers are covered and participate in 
a plan. Employers generally offer one of three types of plans: 
industry- wide plans, single company plans, and plans for specific 
professional groups, such as doctors; however, employers also can 
decide to sponsor a plan through an insurance company. 

Switzerland has a mandatory private pension system that covers over 90 
percent of eligible workers.[Footnote 40] Officials told us that by 
law, Swiss employers are required to provide pension coverage for 
workers earning over a minimum threshold of income.[Footnote 41] 
Workers may be covered in single company plans, multi-employer plans, 
or industry-wide pension plans, or employers can decide to sponsor a 
plan through an insurance company. A special default pension fund 
exists for employers who do not offer a specific pension plan.[Footnote 
42] Several officials we interviewed in Switzerland said that mandatory 
coverage is a key strength of the Swiss private pension system. Before 
Switzerland implemented a mandatory private pension system in 1985, 
officials told us that only about 50 percent of workers were covered. 

[Text box: Private Pension Plan Governance: Laws in the Netherlands and 
Switzerland require private pension funds to be managed by independent 
entities with no legal or financial link to the sponsoring employers. 
This helps mitigate the risk that a pension fund will become insolvent 
if the employer goes bankrupt. Most pension funds in the Netherlands 
and Switzerland are non-profit entities with their own governing boards 
that have equal representation of employers and employees. Similarly, 
in the United Kingdom, the Personal Accounts plans will be administered 
on a nonprofit basis by a Trustee Corporation, with advisory panels 
comprised of employers and employees. In all three systems, this allows 
for shared input on key decisions, such as asset management in the 
Swiss and Dutch DB plans. In contrast, most private pension plans in 
the United States are not financially and legally independent from the 
sponsoring employer. In most DC plans, the sponsoring employer is 
responsible for administering the plan, including selecting and 
monitoring investment options offered to plan participants. In 
addition, most DB pension fund assets in the United States are 
financially linked to the sponsoring employer’s company balance sheet 
as the pension funds are considered a part of the sponsoring employer’s 
assets and liabilities. End of text box] 

The United Kingdom is in the process of introducing an auto-enrollment 
policy into its voluntary private pension system to increase pension 
coverage. According to officials in the U.K., the Pension Act of 2008 
mandates U.K. employers to automatically enroll all eligible workers 
into a qualified employer-sponsored plan starting in 2012 or the new 
system of DC accounts called "Personal Accounts" that was established 
by statute and will be run by a nonprofit trustee corporation.[Footnote 
43] While some of the details of the Personal Accounts plan are still 
being developed, U.K. officials told us that employers sponsoring their 
own pension plans will be exempt from auto-enrolling employees into 
Personal Accounts provided they operate a plan of equal or better 
value.[Footnote 44] Workers have the choice to opt out of the plan, 
thus their participation is voluntary. The United Kingdom's goal is to 
increase coverage, especially among low-and middle-income income 
workers. Officials said they expect about 70 percent to 90 percent of 
those automatically enrolled will not opt out which could increase the 
total private pension coverage from 33 percent to over 75 percent under 
this policy. Most officials and organizations we interviewed in the 
United Kingdom said that mandating auto-enrollment but allowing workers 
to opt out is a key feature that will increase coverage, and two 
officials said that requiring auto-enrollment is a constructive 
compromise because it directs individual inertia toward enrollment 
while preserving individual choice. Government officials said the 
previous reforms were largely unsuccessful at increasing total coverage 
because they provided access but relied on workers to actively enroll. 
The "Stakeholder Pensions" introduced in 2001 as a reform to the 
pension system were similar to the new Personal Accounts plans in that 
they were DC account-based plans; however, they did not significantly 
increase coverage because they required workers to make an active 
decision to participate in the plan, rather than use automatic 
enrollment. A limitation to auto-enrollment is that some workers may 
still choose to opt out and coverage may not increase as much as 
anticipated. To address this concern, employers will be required to 
automatically re-enroll workers every 3 years so that workers will be 
able to reconsider their decision periodically and will have to 
affirmatively decide to leave the plan. 

Contributions: 

Each country's pension system requires contributions by both employers 
and workers to increase retirement savings (see table 6). 

Table 6: Total and Distribution of Contributions to Private Pension 
Plans in the United Kingdom, the Netherlands, and Switzerland, 2009: 

Employer; 
United Kingdom[A]: 38% of contributions; (3% of salary); 
Netherlands: 66% - 75% of contributions; (7% - 19% of salary); 
Switzerland: >50 % of contributions; (3.5% - 9% of salary). 

Worker; 
United Kingdom[A]: 50% of contributions; (4% of salary); 
Netherlands: 25%-33% of contributions; (3% - 8% of salary); 
Switzerland: <50 % of contributions; (3.5% - 9% salary). 

Government; 
United Kingdom[A]: 13% of contributions; (1% of salary); 
Netherlands: None; 
Switzerland: None. 

Total percentage of salary; 
United Kingdom[A]: 8%; (minimum required by law); 
Netherlands: 10% - 25%; (negotiated between employers and unions); 
Switzerland: 7% - 18%[B]; (minimum required by law). 

Total preretirement income replacement goal (public and private pension 
income combined); 
United Kingdom[A]: 45%; (projected); 
Netherlands: 70%; 
Switzerland: 60%. 

Source: Discussions with officials in the Netherlands, Switzerland, and 
the United Kingdom, and examination of materials about employer- 
sponsored plans in those countries. 

[A] Figures for the United Kingdom are for the new Personal Accounts 
plans, which are currently under development and scheduled to go into 
effect in 2012. 

[B] In Switzerland, the amount of the required contribution amounts 
increase with age. 

[End of table] 

Officials in Switzerland told us that Swiss federal law sets minimum 
contributions for employers and workers, requiring employers to pay at 
least half of the total of contributions. Mandatory minimum total 
contributions in Switzerland increase with age.[Footnote 45] Officials 
in Switzerland also told us that many employers contribute more than 
the required minimum.[Footnote 46] Under recent reforms, the United 
Kingdom is also using a mandatory approach to minimum contributions. 
Officials in the United Kingdom told us that mandatory minimum 
contributions are required from employers and workers participating in 
an employer-sponsored or Personal Accounts plan. Officials also said 
they expect the minimum required employer contributions to be phased in 
gradually, starting at 1 percent of earnings in 2012, 2 percent of 
earnings in the second phase, and 3 percent of earnings upon final 
implementation.[Footnote 47] Also, officials said that the contribution 
structure is based on the principle of sharing responsibility among all 
stakeholders, and that the government and employer contributions were 
designed to provide an incentive for workers to participate. Government 
officials in the United Kingdom said that mandating minimum employer 
and worker contributions in the recent reforms is particularly 
important for increasing total retirement savings. Officials said one 
of the reasons the previously introduced Stakeholder Pensions failed to 
increase retirement savings was because contributions were not mandated 
and many accounts had low balances. However, one insurance company 
official said that there is some concern among employers about 
mandating minimum contributions through automatic enrollment because it 
will likely increase the total costs of their pension plans as more 
workers participate and require employer contributions. Officials told 
us that they are considering ways to mitigate the impact of this 
mandate on the smallest employers. 

Officials in the Netherlands told us while minimum contributions are 
not mandated in the Netherlands, labor contracts negotiated between 
employer and worker representatives specify required contribution 
levels for employers and workers in most companies or industries. 
[Footnote 48] Officials also said that this process of negotiation is a 
key strength of the system because it leaves the decision making up to 
the directly affected parties. As a result, worker and employer 
contributions in the Netherlands vary across companies and industries. 
Pension fund boards can sometimes request an increase in both worker 
and employer contributions to make up funding shortfalls in the pension 
plan. However, several officials said that in recent years, a few DB 
plans have been converted to collective DC (CDC) plans in which 
employers' contribution levels are fixed, even when there is a funding 
shortfall.[Footnote 49] Officials said that while fixing employer 
contributions in CDC plans shifts some of the investment risk within 
pension funds to the workers, employers prefer this structure because 
their costs become more predictable.[Footnote 50] 

While mandating contributions can help workers accumulate sufficient 
pension benefits, it also can pose some challenges. For example, it 
could become the norm for workers and employers to make the minimum 
contributions and even encourage some that currently contribute to a 
pension plan at a higher rate to switch to lower contributions at the 
required minimum level, thus increasing the risk of inadequate 
retirement savings. U.K. officials said it will be a challenge to 
convey to the public that the employer and worker contribution rates 
that will be required in Personal Accounts are a minimum level of 
commitment rather than a target. Experts said that some employers 
currently offering pension plans in the United Kingdom may decrease 
their contributions to the minimum requirement, which is expected to be 
3 percent of pay after they are fully phased in. Officials said that 
the government plans to address this problem by giving certain 
incentives to employers that have higher-than-minimum contribution 
rates, such as granting extensions on the deadline for automatically 
enrolling workers. In addition, GAO has previously found that lower- 
income workers face competing income demands for basic necessities, 
thus requiring mandatory minimum contributions could adversely affect 
lower-income workers who may find it difficult to contribute due to 
financial constraints. To address this concern, officials in the United 
Kingdom and Switzerland told us they have established minimum earnings 
thresholds under which low-income workers are excluded from 
participating.[Footnote 51] 

Indexation of Benefits and Guaranteeing Returns Mitigate Investment 
Risk for Individual Workers: 

The pension systems in the Netherlands and Switzerland address 
investment risks faced by workers in various ways, such as pooling 
assets and guaranteeing rates of return. In the Netherlands and 
Switzerland, most private pension fund assets are pooled and managed by 
a pension fund board comprised of employer and worker representatives. 
[Footnote 52] Officials from the Netherlands and Switzerland said that 
investment risk and management responsibility of pension funds were 
shared by the social partners--employers and workers. Officials from 
the Netherlands and Switzerland said that the social partnership 
between employers and workers was a key feature of their systems, and 
officials from the Netherlands said that there has been a slower shift 
from DB plans to self-directed DC plans than in other countries because 
of this partnership. Officials from Switzerland said that structuring 
assets collectively through a pension fund was more important in their 
system than maintaining individual control over assets, highlighting a 
key trade-off of investment features in private pension plans. In 
addition, officials told us that the governments in the Netherlands and 
Switzerland impose restrictions on pension fund boards' asset 
management in DB plans to protect workers against investment risks. For 
example, officials said that pension funds in Switzerland are limited 
to investing no more than 50 percent of total assets in equities, no 
more than 30 percent in foreign currencies, and no more than 5 percent 
in the sponsoring employer. 

In the Netherlands, most DB pension plans share investment gains by 
periodically adjusting the value of workers' benefits, a process known 
as "indexation."[Footnote 53] According to officials, pension boards 
usually adjust workers' and also retirees' benefits conditional on the 
pension fund's overall funding level.[Footnote 54] According to 
officials, if the plan's funding ratio is above the established 
benchmark, benefits are indexed to reflect the growth in wages or 
prices. However, if the plan's funding ratio is below the established 
benchmark benefits may only be partially indexed or not indexed at all. 
[Footnote 55] Labor contracts between employers and workers in the 
Netherlands specify exactly how indexation is to be determined. The 
process of indexation allows pension funds to spread investment gains 
or losses to all participants in the pension fund--active workers, 
those who have left the employer but keep their accrued benefits in the 
fund, as well as retirees--by either applying or not applying 
adjustments to accrued benefits and pensions. Officials in the 
Netherlands said that sharing investment risk by indexing accrued 
benefits conditional on the plan's funding ratio helps protect workers 
from individually bearing investment risk. While this approach reduces 
individual investment risk, according to experts, the recent decline in 
investment returns caused by the financial crisis has prevented full 
indexation in many pension funds in the Netherlands and may lead to 
lower-than-expected benefits, especially for those close to retirement. 
Recent data from the Central Bank of Netherlands shows that the average 
funding ratio of pension funds in the Netherlands at the end of 2008 
was 95 percent, which is below the minimum level required for 
indexation. Thus, in the near term, pension benefits for many workers 
and retirees will not be adjusted to account for the growth in wages or 
inflation. However, if funding levels recover sufficiently, pension 
boards may decide to grant "catch-up" indexation to compensate for 
indexation not granted or partially granted in past years. Officials in 
the Netherlands said catch-up adjustments were applied by many pension 
funds after the financial crisis in the early 2000s; however it is 
unclear when pension funds will have recovered sufficiently from the 
current economic downturn in order to make similar catch-up 
adjustments. Officials said that the Central Bank also requires that 
plans with a funding level below the minimum level required for 
indexation submit recovery plans detailing how they will restore 
funding levels, and currently government and pension funds are 
examining whether to extend the recovery period length in light of the 
recent turmoil in financial markets. 

Figure 3: Risk-sharing through Conditional Indexation of DB Pension 
Benefits in the Netherlands: 

[Refer to PDF for image: illustration] 

Netherlands Ministry of Social Affairs and Employment: 
* sets legal regulations for pension funds including indexation policy. 

Pension fund: Pension board: 
* Worker representatives; 
* Employer representatives. 

Together they formulate: 

Employment contract: 
* Contribution levels; 
* Benefit accrual rate; 
* Conditions under which benefits are indexed. 

Contributions and Net investment returns combine to form Assets. 
Benefits promised to participants are Liabilities. Assets and 
Liabilities create Pension fund solvency. 

Central Bank of the Netherlands: 
* supervises indexation policy. 

Funding ratio: 

130%: Benefits may be fully adjusted in line with price/wage growth; 
105%: Benefits may be partially adjusted; pension funds must submit 15- 
year recovery plan for increasing funding ratio to 130 percent; Under 
105%: Benefits may not be adjusted; pension funds must submit 3- year 
recovery plan for increasing funding ratio to 105 percent. 

Recovery plans: 

Impact on workers' benefit accruals: 
Indexation of benefits: 
Full; 
Partial; 
Base benefit accrual. 

Impact on retirees' benefits in payment: Indexation of benefits: 
Full; 
Partial; 
Base benefit accrual. 

Sources: GAO analysis based on discussions with officials in the 
Netherlands; images, Art Explosion. 

[End of figure] 

Alternatively, Switzerland mitigates investment risk faced by workers 
through a guaranteed minimum rate of return on accrued benefits. 
Officials told us that when the mandatory private pension system was 
implemented in 1985, the minimum rate of return was set at 4 percent. 
[Footnote 56] However, in 2003, the government began adjusting the rate 
to more accurately reflect market rates of return and since then it has 
been reduced to 2 percent. Several officials we spoke to in Switzerland 
said that many Swiss pension funds usually provide investment returns 
higher than the minimum rate set by the government when funding levels 
of the pension fund allow. Although this guarantee provides workers 
some certainty regarding benefits, ensuring that benefits will increase 
by the specified amount can be challenging for the pension funds and 
insurance companies responsible for providing the guarantee. For 
example, in order to avoid having shortfalls, pension funds have an 
incentive to invest in lower-risk assets that tend to pay lower 
returns, which may restrain investment gains that would otherwise be 
earned. Furthermore, experts and officials in Switzerland said that 
setting the guaranteed minimum rate can be difficult because 
stakeholders have different interests. For example, workers generally 
favor higher guaranteed rates while insurance companies favor lower 
rates. Setting the rate requires law-makers to consider the trade-offs 
for all stakeholders. Usually, the minimum guaranteed interest rate is 
reviewed by the government every year and is adjusted every other year. 
In light of the financial crisis, the new rate may be reviewed as early 
as next year, ahead of the normal schedule. 

Unlike the Netherlands and Switzerland, there has been a shift from DB 
to DC plans in the United Kingdom, thus more workers in the United 
Kingdom bear investment risk individually. U.K. officials are still 
discussing what types of investment options they will provide in the 
Personal Accounts plan. However, officials told us there will be a 
default investment option for workers that do not want to select their 
own investment allocations. Officials said the majority of workers 
enrolled into Personal Accounts plans are expected to remain with the 
default option and not actively choose how their particular assets are 
invested, so that the design of the default investment option will be 
an important part of the plan. 

The Netherlands', Switzerland's, and the United Kingdom's Pension 
Systems Facilitate Benefit Portability in the Workforce and Limit 
Preretirement Benefit Leakage: 

The private pension systems in the Netherlands, Switzerland, and the 
United Kingdom facilitate portability in various ways, allowing workers 
to preserve benefits when they change jobs or leave the workforce. In 
the Netherlands and Switzerland, where the vast majority of workers 
have DB plans, officials told us that accrued benefits are portable 
because workers have the legal right to transfer them when they change 
jobs, even if they change industries or types of plans.[Footnote 57] 
When a worker changes jobs in the Netherlands or Switzerland, the 
accrued benefits in the old plan are used to buy pension credits in the 
new plan. In the Netherlands, officials told us workers also can decide 
to leave their accrued benefits with the old pension fund; their 
benefits are then indexed in line with retiree benefits, conditional on 
the fund's solvency. In Switzerland, officials said that if a worker 
does not transfer benefits to a new employer or leaves the workforce, 
benefits are transferred to a "portability institution fund," an 
account provided by banks and life insurance companies, or a public 
default fund.[Footnote 58] According to officials, benefits are 
"parked" in these institutions until being transferred to another 
pension fund, for example when a worker takes a new job, and generally 
earn a minimum interest rate, which is usually lower than the 
guaranteed interest rate set for other pension plans, but protects 
workers' benefits from being eroded by inflation. One trade-off to 
facilitating the portability of accrued DB benefits is that employers 
may lose a workforce management tool that allows them to regulate the 
size of their workforce in response to changing economic conditions. 

In the United Kingdom, the Personal Accounts plan's centralized 
structure will enable workers to maintain a single account throughout 
their career that each employer can contribute to and keeps accrued 
benefits in one location. In addition, officials said that 
preretirement benefit leakage in the forms of loans and hardship 
withdrawals will be prohibited. Further, transfers between plans will 
not be allowed with Personal Accounts prior to drawing down benefits in 
retirement. As a result, workers will not be able to consolidate until 
the age of 55 if they have a Personal Account and other employer 
accounts. Officials in the United Kingdom told us that the rule 
prohibiting transfers in and out of Personal Accounts was an important 
compromise for consensus building, particularly for the financial 
industry, as there was concern that workers may transfer funds out of 
existing plans into Personal Accounts plans. A trade-off to prohibiting 
transfers and consolidations, however, is that workers may have 
multiple accounts, which would be administratively more complex for 
both employers and workers to manage. 

The Netherlands and the United Kingdom prohibit early withdrawals, such 
as loans or hardship withdrawals, from private pension plan savings as 
a way to limit the risk of leakage of a worker's retirement benefits, 
according to officials in those countries. A trade-off for restricting 
leakage is that it may deter workers from participating in a voluntary 
system or making contributions beyond the minimum requirements. For 
example, some workers may want the right of access to retirement funds 
in hardship situations. Unlike the Netherlands and the United Kingdom, 
officials told us workers in Switzerland are able to access their 
benefits prior to retirement in limited circumstances. For example, 
officials said that workers are able to cash out accrued benefits to 
purchase a home, start a business, or if they move outside the European 
Union. However, officials in Switzerland said that benefit leakage 
rarely occurs because the Swiss are particularly "conservative and 
cautious" when drawing from their pension fund assets. 

Widespread Use of Lifetime Annuities and Limits on Lump-Sum Payments 
Reduce Risks in Drawing-down Benefits during Retirement: 

Pension plans in the Netherlands, Switzerland, and the United Kingdom 
commonly provide benefits in the form of annuities in retirement, 
limiting the risk that individuals may draw down their benefits too 
quickly and outlive their assets. In the Netherlands and Switzerland, 
pension funds typically provide the annuities directly, rather than 
facilitate purchases through insurance companies.[Footnote 59] In the 
Netherlands, officials said that limited lump-sum payments are allowed 
only when accrued benefits amount to very small annuity payments. 
[Footnote 60] In Switzerland, officials said that most people receive 
their pension benefits as a monthly annuity; however, pension funds 
must allow retirees to receive at least 25 percent of their accrued 
benefits as a lump-sum payment. Swiss pension funds can decide to allow 
retirees to take 100 percent of their accrued benefits as a lump-sum 
distribution, but officials told us this is usually only offered by 
small businesses or companies with very low or very high earners. In 
addition, officials told us Swiss law sets a mandatory minimum annuity 
conversion rate for pension benefits--the factor used to convert the 
accrued benefits into lifelong monthly payments.[Footnote 61] Although 
a minimum conversion rate provides some form of guarantee on the amount 
retirees will receive in annuity payments, officials and experts in 
Switzerland told us that the current rate may be too high for pension 
funds and insurance companies to meet. For example, insurance companies 
may be strained to provide benefits using the minimum conversion rate 
if investment earnings are insufficient or longevity assumptions are 
too low. In recent years there has been debate in Switzerland about 
lowering the minimum annuity conversion rate due to lower investment 
returns and increases in life expectancy.[Footnote 62] Another 
difficulty to setting a standard annuity conversion rate is that using 
the same rate for all individuals in a given group generally benefits 
those with greater longevity. Insurers in Switzerland have been 
involved in a debate with the government in the last several years 
about using a lower annuity conversion rate, particularly for women 
because on average women live longer than men and therefore collect 
pensions for a greater number of years. 

The United Kingdom's pension plan law requires retirees to annuitize at 
least 75 percent of their accrued benefits from pension plans, 
including Personal Accounts plans, by the age of 75, according to 
officials. Annuitizing benefits guarantees that retirees will have 
income for the rest of their lives, but it limits their access to their 
entire accrued benefit, which could, in the event of an emergency, be 
problematic. The government will facilitate the purchase of the 
annuities from private insurers. However, officials we spoke to in the 
United Kingdom said there could be some challenges in annuitizing small 
account balances because monthly payments will be very small and not 
cost effective to administer. Government officials said they are 
addressing this issue by allowing small account balances to be 
distributed as lump-sums.[Footnote 63] Like other pension plans, the 
Personal Accounts plan also will allow all retirees to take a one-time 
lump-sum distribution of up to 25 percent of the accrued benefit; if no 
lump-sum is taken by age 75, the entire account balance is converted 
into an annuity. This approach helps reduce the risk that retirees will 
outlive their savings while providing individuals access to some 
portion of their accrued benefits. 

In some cases annuity payments are also adjusted for inflation to 
mitigate the risk that an increase in prices erodes the purchasing 
power of retirement income. According to officials, pension boards in 
the Netherlands and Switzerland decide on a plan-by-plan basis whether 
to index retirees' annuity benefits for inflation. In both countries, 
officials said indexation is usually applied to retirees' benefits 
conditional on the funding level of the pension fund; also, there is no 
guarantee that retirees' benefits will be adjusted for inflation each 
year. Specifically, in the Netherlands, officials said that if the 
pension plan's funding level is above the minimum standard set by the 
Central Bank, benefits can be fully indexed for inflation.[Footnote 64] 
However, if the pension fund is below the required funding level, then 
retirees' benefits cannot be so indexed. Officials in the Netherlands 
told us that while pension funds have regularly adjusted retiree 
benefits for inflation in the past, they are unlikely to do so in 2009 
because of the current market downturn. Additionally, officials told us 
that negotiations about benefit adjustments between active workers and 
retirees can be difficult. For example, pension fund boards, made up of 
employee and worker representatives, can decide to adjust workers' and 
retirees' benefits differently, although this decision is sensitive 
because it directly affects retirees' benefits that are in payment. 
[Footnote 65] Pension boards in Switzerland also decide on a plan-by- 
plan basis whether to index pension benefits for inflation. Although 
the indexation of retirees' benefits is not guaranteed, benefits are 
usually adjusted based on the funding levels of the pension fund. If 
pension funds in Switzerland are fully funded, the pension board 
usually grants adjustments to benefits; however, if plans are less than 
fully funded, indexation of retirees' benefits is prohibited. 

In contrast, officials said the United Kingdom's Personal Accounts plan 
will not require benefits to be indexed for inflation. Officials expect 
that most workers will use the savings accrued in their Personal 
Accounts to purchase basic low-cost annuities which generally do not 
adjust benefits for inflation. Officials said that because inflation 
has been low in the past, it was not a concern in designing the system. 
However, it represents a possible risk workers face in the future in 
terms of preserving the purchasing power of their benefits. 

Domestic Proposals Incorporate Different Approaches to Reduce 
Retirement Risks to Workers but also Pose Trade-offs: 

Proposals for alternative pension plans designs in the United States 
use a variety of voluntary and mandatory approaches to address the 
risks that workers face; however, they also pose trade-offs. Four key 
proposals address a broad range of risks and two additional proposals 
focus specifically on addressing risks associated with retirees' 
drawdown of lump-sum benefits by presenting options for increasing the 
use of annuities. However, the proposals also present trade-offs, 
including higher costs for workers, employers, and the federal 
government. Nonetheless, our computer modeling projections, based on a 
sample of workers born in 1990, show that options to expand pension 
coverage can considerably increase the amount of income available for 
retirement, especially for low-income workers: 

Key Proposals in the U.S. Use Voluntary and Mandatory Approaches to 
Reduce a Broad Range of Risks: 

Several proposals for alternative pension plan designs in the United 
States incorporate approaches to mitigate the risks that workers face, 
such as voluntary incentives to increase coverage or mandatory 
annuitization. Four proposals address a broad range of risks in the key 
areas we outlined: (1) The Urban Institute's Super Simple Saving Plan, 
(2) The ERISA Industry Committee's New Benefit Platform for Life 
Security, (3) The New America Foundation's Universal 401(k) Plan, and 
(4) The Economic Policy Institute's Guaranteed Retirement Accounts Plan 
(GRA). We selected these plans because they incorporate strategies to 
address risks workers face, are developed in enough detail to allow us 
to fully analyze them, are not duplicative, and have been proposed or 
considered in the last 5 years. [Footnote 66] Table 7 summarizes the 
approaches these proposals use to mitigate retirement income risks 
faced by workers and some of the approaches used in each are discussed 
below. 

Table 7: Key Domestic Proposals for Alternative Pension Plan Designs: 

Proposal description; 
Super Simple Saving Plan: Simplified private sector DC plan; 
A New Benefit Platform for Life Security: System of private-sector 
"Benefit Administrators" providing DB and DC plans; 
Universal 401(K) Plan: Government-established DC plan; 
Guaranteed Retirement Accounts Plan: Government-established hybrid DB/DC plan. 

Coverage; 
Super Simple Saving Plan: Voluntary; employers given incentives to 
offer; workers automatically enrolled if employer offers plan but can 
opt out; 
A New Benefit Platform for Life Security: Voluntary; employers can 
offer a DB or DC plan through the centralized system instead of 
sponsoring their own plan; workers can also set up plans on their own 
through the centralized system; 
Universal 401(K) Plan: Voluntary; available to workers without an 
employer-sponsored plan; workers automatically enrolled but can opt 
out; 
Guaranteed Retirement Accounts Plan: Mandatory; all workers without an 
equivalent or better DB plan required to participate. 

Contributions; 
Super Simple Saving Plan: Mandatory minimum employer contributions of 
3% (or matching formula that would achieve the same end); default 
worker's contribution of 4% suggested with automatic escalation to 8%; 
government match provided; 
A New Benefit Platform for Life Security: No minimum contributions 
required; employers and workers can contribute to DB and DC plans, 
auto-escalation for DC plans is an option; Proposal also includes an 
optional supplement calling for mandatory minimum worker contributions; 
Universal 401(K) Plan: Employer contributions allowed but not required; 
default contribution rates between 3% and 5% and auto-escalation 
suggested for workers; government match for all workers; 
Guaranteed Retirement Accounts Plan: Mandatory minimum contributions from 
workers and employers of 2.5% each; government refundable tax credit of 
$600 for all workers, regardless of income. 

Investment; 
Super Simple Saving Plan: Not addressed; 
A New Benefit Platform for Life Security: Minimum return for DB plans 
guaranteed by Benefit Administrators providing plans in the centralized 
system; preset fund mixes, such as life cycle funds, are offered for 
DC plans; 
Universal 401(K) Plan: Default investment allocation into life cycle 
funds; 
Guaranteed Retirement Accounts Plan: Minimum 3% annual real return 
guaranteed by the government. 

Portability[A]; 
Super Simple Saving Plan: Fully portable; all contributions are fully 
vested; 
A New Benefit Platform for Life Security: Fully portable due to 
centralized structure; all contributions are fully vested; 
Universal 401(K) Plan: Fully portable; all contributions are fully vested; 
Guaranteed Retirement Accounts Plan: Fully portable due to centralized 
structure; all contributions are fully vested. 

Leakage; 
Super Simple Saving Plan: Prohibits leakage of employer and government 
contributions; allows loans and hardship withdrawals of workers' 
contributions; 
A New Benefit Platform for Life Security: Prohibits leakage from DB 
plans but not DC plans; short-term savings account is an alternative 
tax-deferred vehicle designed to limit leakage; Universal 401(K) Plan: 
Prohibits loans, allows hardship withdrawals; prohibits any leakage of 
government contributions; Guaranteed Retirement Accounts Plan: 
Prohibits loans, allows hardship withdrawals only in case of 
disability. 

Fees; 
Super Simple Saving Plan: Administrative fees expected to be lower than 
in current DC plans due to simplified plan design; 
A New Benefit Platform for Life Security: Administrative fees expected 
to be lower than in current DC plans due to economies of scale; Universal 
401(K) Plan: Administrative fees expected to be lower than in current DC 
plans due to economies of scale and limited number of investment options; 
Guaranteed Retirement Accounts Plan: Administrative fees expected to be 
lower than in current DC plans due to economies of scale. 

Drawdown of benefits; 
Super Simple Saving Plan: Not addressed; 
A New Benefit Platform for Life Security: Mandatory annuitization of DB plans; 
Universal 401(K) Plan: Default annuitization but can opt out and take a 
lump-sum instead; 
Guaranteed Retirement Accounts Plan: Mandatory inflation adjusted 
annuity; partial lump-sum allowed. 

Source: GAO analysis of key domestic proposals for alternative pension 
plan designs. 

[A] When we discuss portability in this section of the report we are 
referring to the ability of plan participants to transfer accrued 
benefits from one plan to another. 

[End of table] 

Super Simple Saving Plan: 

The Super Simple Saving Plan proposes a voluntary system of private 
sector DC accounts that includes features designed to expand coverage 
and increase contributions.[Footnote 67] Its goal is to establish a 
minimum base of retirement security for low-to middle-income workers by 
converting certain DC plans in the existing retirement system to a 
single, simplified DC plan.[Footnote 68] The Super Simple Plan is 
modeled on the United Kingdom's new plan for Personal Accounts but, 
unlike the U.K. plan, employers are not required to offer it to their 
workers. The Super Simple Plan adopts approaches intended to address 
risks related to coverage, contributions, portability, leakage, and 
fees (see table 7). The proposal's authors told us that many of the 
details about the approaches used in the Super Simple plan are subject 
to variation, such as the contribution rates, although they offer 
suggestions with respect to those details. In particular, the plan 
suggests the approaches outlined in table 8 to address risks related to 
coverage and contributions. 

Table 8: The Super Simple Saving Plan's Approaches to Coverage and 
Contributions: 

Risk area: Coverage; 
Employer: Voluntary--Incentives; Provides incentives for employers to 
adopt the plan, including a simplified plan design intended to lower 
administrative costs by eliminating annual nondiscrimination testing 
and reporting requirements, and providing government matching 
contributions and higher contribution limits than allowed in standard 
401(k) plans[A]; 
Worker: Voluntary--Automatic enrollment; If employer adopts the plan, 
all but very short-term workers are covered and are automatically 
enrolled; Workers can opt out if they do not want to participate; 
Government: Not applicable. 

Risk area: Contributions; 
Employer: Mandatory--if participating; 3% of pay suggested amount of 
mandatory minimum contribution (or matching formula that would achieve 
the same end); Employers can contribute more as long as they contribute 
the same percentage of pay for all their workers; Worker: Mandatory--if 
participating; 4% of pay default contribution suggested with automatic 
escalation up to 8% through annual or biennial 1% of pay increases; 
Workers can choose to contribute more or less than the default; 
Government: Matching contribution--refundable tax credit; Design has 
been left open to discussion, but authors suggest some potential match 
rates: Equal to a percentage of employer and worker contributions up to 
some amount; 1% match of pay; 2% match of pay on the first $10,000 of 
wages. 

Source: GAO analysis of Super Simple Saving Plan proposal. 

[A] In 2008, workers participating in standard 401(k) plans could 
contribute up to $15,500 from their own funds and the total 
contribution including employer contributions could not be more than 
$46,000. The Super Simple plan would allow all workers to contribute up 
to a flat dollar amount, such as $46,000, minus any employer 
contributions. Business owners can also establish plans for themselves 
as employees of the company and make tax-preferred worker contributions 
up to the legal limit. 

[End of table] 

Administrative and legal changes required by the Super Simple proposal 
include eliminating the reporting and nondiscrimination testing 
requirements and replacing the Saver's Credit with government matching 
contributions (see appendix III).[Footnote 69] 

A New Benefit Platform for Life Security: 

The New Benefit Platform for Life Security proposes a voluntary system 
in the private sector to provide DB and DC plans as an alternative to 
the employer-based system and includes features to increase coverage 
and portability, and guarantees a minimum investment return to DB 
plans. [Footnote 70] A primary goal of the New Benefit Platform is to 
expand benefits to a larger base of the population. The plan's 
structure separates plan governance from the employer, which is similar 
to the independent governance structures that private pension plans 
have in the Netherlands, Switzerland, and the United Kingdom The plans 
would be administered and managed independently from employers by a 
system of either non-or for-profit Benefit Administrators that compete 
with each other in the private sector on quality, design, and cost, 
according to the proposal's author. Benefit Administrators could either 
provide the benefits directly or arrange for third parties to provide 
them. Benefit Administrators will assume the liability deemed 
appropriate for the benefits they provide. According to the proposal's 
author, fiduciary responsibility should follow function, thus the 
Benefit Administrators would bear much of the fiduciary responsibility. 
Employers would still have some responsibility for due diligence 
related to the arrangements they offer through the plan. The New 
Benefit Platform includes approaches intended to reduce risks related 
to coverage, contributions, investments, portability, leakage, fees, 
and the drawdown of benefits in retirement (see table 7). In 
particular, the plan uses the approaches outlined in table 9 to address 
risks related to coverage, portability, and investments. 

Table 9: The New Benefit Platform for Life Security's Approaches to 
Coverage, Portability, and Investments: 

Risk area: Coverage; 
Employer: Voluntary; Employers can offer their workers a DB plan, a DC 
plan, or both through Benefit Administrators instead of sponsoring a 
traditional DB or DC plan. Employers can add an automatic-enrollment 
feature to the DC plan; 
Worker: Voluntary; All workers may be automatically enrolled into a DC 
or DB plan, but can opt out. Workers whose employers do not offer a 
plan, including self-employed, part-time, and contingent workers, can 
also independently join a Benefit Administrator's plan; 
Government: Not applicable. 

Risk area: Portability; 
Employer and Worker: The centralized plan structure facilitates 
portability, as workers can keep the same account when they change 
employers; 
Government: The government establishes uniform service areas throughout 
the country for each of the core benefits (retirement and health) so 
that two or more Benefit Administrators would be available to every 
employer and individual worker. 

Risk area: Investments; 
Employer and Worker: In the DB plan, Benefit Administrators guarantee 
the principal--employers' and workers' contributions--and a rate of 
return on the investments, such as 3%, or an indexed rate.[A] Benefit 
Administrators providing the plans manage DB plan assets; there are no 
self-directed DB accounts; 
Government: Not applicable. 

Source: GAO analysis of A New Benefit Platform for Life Security 
proposal. 

[A] The proposal suggests options for a guaranteed rate of return but 
does not specify a set amount. The author anticipates that Benefit 
Administrators would develop competing products that could provide real 
or nominal rates of return. 

[End of table] 

Administrative and legal changes required by the New Benefit Platform 
include transferring most fiduciary liability from employers to 
Benefits Administrators, and simplifying nondiscrimination rules. 
[Footnote 71] The federal government would also have to set standards 
for Benefit Administrators and regulate the system (see appendix III). 

Universal 401(k) Plan: 

The Universal 401(k) Plan proposes a voluntary system of DC accounts 
that incorporates several automatic and default features.[Footnote 72] 
Its primary goal is to give every worker access to a government- 
administered DC retirement savings account. It is similar to the United 
Kingdom's Personal Accounts Plan, which was established by the 
government to increase saving by low-and middle-income workers and the 
author told us it is intended to supplement, not replace, the existing 
retirement system.[Footnote 73] The Universal 401(k) accounts are 
provided through a centralized clearinghouse structure that is 
established and administered by the federal government as an 
alternative to the current system of employer-sponsored retirement 
plans geared toward low-and middle-income workers whose employers 
generally do not offer any plan. The Universal 401(k) Plan adopts 
approaches intended to reduce risks related to coverage, contributions, 
investments, portability, leakage, fees, and the drawdown of benefits 
in retirement (see table 7). In particular, the plan uses the 
approaches outlined in table 10 to address risks related to coverage, 
contributions, investments, and the drawdown of benefits in retirement. 

Table 10: The Universal 401(k) Plan's Approaches to Coverage, 
Contributions, Investments, and the Drawdown of Benefits in Retirement: 

Risk area: Coverage; 
Employer: Employers facilitate enrollment through W-4 forms unless they 
already cover their workers in an employer-sponsored plan; 
Worker: Voluntary--Automatic enrollment; All workers not participating 
in an employer-sponsored retirement plan, including part-time workers 
and recent hires not yet eligible for employer-sponsored plans, are 
automatically enrolled in the Universal 401(k). Workers can opt out if 
they do not want to participate; 
Government: The government establishes a Universal 401(k) plan that 
gives every worker access to a retirement savings plan. 

Risk area: Contributions; 
Employer: Voluntary; Employers can contribute but are not required to. 
If employer contributions are made, they are limited to a flat 
percentage of wages or a flat dollar amount and must be made for all 
workers, including part-time workers; 
Worker: Voluntary--Default levels; 3% to 5% of pay default contribution 
with automatic escalation up to 8% through annual 1% of pay increases 
suggested. Workers can choose to contribute more or less than the default 
amount; 
Government: Matching contribution--refundable tax credit deposited 
directly into workers' accounts; suggested match levels: 1:1 match on 
the first $2,000 in savings for workers earning up to $40,000; 1:2 
match on the first $4,000 in savings for workers earning more than 
$40,000. 

Risk area: Investments; 
Employer: Not applicable; 
Worker: Default investment allocation, such as a life cycle fund, is 
provided; Workers who want to make their own investment decisions can 
choose from a limited number of broad and low-cost index funds; 
Government: The government offers a very limited number of broad and 
low-cost index funds for workers to invest in, as well as a default 
investment option, such as a life cycle fund. 

Risk area: Drawdown of benefits; 
Employer: Not applicable; 
Worker: Account balances are automatically converted to annuities that 
are purchased through the federal government at group rates.[A] Workers 
can opt out of the annuity and take a lump-sum distribution; 
Government: Facilitates annuity purchases either by contracting with 
one or more private sector insurers or by managing the annuity payments 
through the Pension Benefit Guaranty Corporation, a federally chartered 
corporation established to insure pension benefits in qualified DB 
plans. 

Source: GAO analysis of Universal 401(k) Plan proposal. 

[A] Inflation-adjusted annuities and deferred annuities are not 
addressed in the proposal but the author told us they could be options. 

[End of table] 

Key legal and administrative changes required by this plan include 
establishing a federally chartered clearinghouse to set up and manage 
workers' accounts, as well as expanding the Saver's Credit and making 
it refundable (see appendix III). 

Guaranteed Retirement Accounts Plan: 

The Guaranteed Retirement Accounts Plan proposes a mandatory system of 
hybrid accounts with DB and DC features designed to increase coverage 
and contributions and preserve retirement benefits.[Footnote 74] Its 
goal is to increase retirement saving by low-and middle-income 
households and provide a basic retirement income for workers. Many of 
its features are similar to those found in the Swiss pension system 
except it is a government-sponsored system instead of an employer-based 
system. The accounts are similar to the hypothetical accounts set up in 
hybrid DB plans, like cash balance plans, and are established and 
administered by the federal government. The proposal adopts approaches 
to address risks related to coverage, contributions, investments, 
portability, leakage, fees, and the drawdown of benefits in retirement 
(see table 7). In particular, the plan uses the approaches outlined in 
table 11 to address risks related to coverage, contributions, 
investments, and the drawdown of benefits in retirement. 

Table 11: The Guaranteed Retirement Accounts Plan's Approaches to 
Coverage, Contributions, Investments, and the Drawdown of Benefits in 
Retirement: 

Risk Area: Coverage; 
Employer: Mandatory; Employers must provide the GRA for all workers who 
are not covered by a qualifying DB plan[A]; 
Worker: Mandatory; All workers who are not covered by an equivalent or 
better employer-sponsored DB plan must participate. Workers whose 
employers are not required to cover them, for example independent 
contractors, must enroll on their own; 
Government: The government establishes a hybrid 
DB/DC plan for all workers that are not covered by a qualifying DB 
plan. 

Risk Area: Contributions[B]; 
Employer: Mandatory; Mandatory minimum 2.5% of pay contribution, up to 
the Social Security earnings cap. Higher contribution rates are 
allowed; 
Worker: Mandatory; Mandatory minimum 2.5% of pay contribution, up to 
the Social Security earnings cap. Higher contribution rates are 
allowed; 
Government: Contribution--$600 refundable tax credit for all workers 
(adjusted for inflation). If the amount of the worker's contribution is 
less than $600, the difference is deposited directly into the worker's 
account.[C]. 

Risk Area: Investments; 
Employer: Not applicable; 
Worker: Minimum 3% real return on investment guaranteed; 
Government: Guarantees a minimum 3% real annual return on investment. 
If actual investment returns are lower than 3% in a given year, uses 
surplus funds it saved in years when returns were higher to contribute 
the difference to workers' accounts.[D] 

Risk Area: Drawdown of benefits; 
Employer: Not applicable; 
Worker: Mandatory annuitization; Workers must convert most of their 
accumulated benefits to an inflation-adjusted annuity. Workers also can 
take a partial lump-sum distribution, either $10,000 or 10% of their 
account balance, whichever is higher, and leave half of their remaining 
account balances to their heirs[E]; 
Government: Facilitates annuity purchases at group rates from an 
insurance company. 

Source: GAO analysis of Guaranteed Retirement Accounts proposal. 

[A] A DB plan qualifies for the exemption criteria if the plan sponsor 
contributes at least 5 percent of payroll to it each year and pays out 
retirement income as an annuity. A 5-year average contribution rate 
would be used to determine whether plans met the exemption criteria. DB 
plan sponsors who make sporadic and uneven contributions would not 
qualify, but hybrid plans like cash-balance plans would qualify as long 
as contributions to it are at least 5 percent of payroll and retirement 
income is paid out as an annuity. 

[B] All contributions (employer, worker, and government) are 
apportioned evenly between husbands and wives. 

[C] The new $600 tax credit replaces the current favorable tax 
treatment of employer and worker contributions to DC plans. However, a 
revenue tax credit of $400 would allow tax-qualified contributions up 
to $5,000 per year to DC plans and would be adjusted for inflation. 

[D] If actual returns are consistently higher than 3 percent over a 
number of years, part of the surplus could be distributed to 
participants. The government would have the ability to lower the amount 
of the guarantee in the event of a protracted period of low returns. 

[E] Workers may bequeath their own contributions plus interest earnings 
on them, but not the employer's contributions, to their heirs. 

[End of table] 

Key legal and administrative changes required by this plan include 
establishing and administering a system of retirement accounts by the 
federal government, information sharing by state and local governments, 
and reducing the current preferential tax treatment of DC plans, such 
as 401(k) plans (see appendix III).[Footnote 75] 

Annuitization Proposals: 

Two additional proposals focus specifically on addressing risks 
associated with retirees' drawdown of lump-sum benefits by presenting 
options for increasing the use of annuities as a way to pay out 
benefits accumulated in DC plans.[Footnote 76] 

[Text box: Types of Annuities: 
Annuities come in a variety of forms, and new products are being 
developed by the insurance industry. Well-known annuity products 
include: 

Single-life annuity: Provides fixed monthly benefit payments guaranteed 
for life. No survivor benefit is paid after the annuitants’ death (also 
called a straight-life annuity). 

Joint and survivor annuity: Provides fixed monthly benefit payments 
guaranteed for life and, upon the annuitants’ death, continues partial 
payments to the surviving spouse or other beneficiary for the rest of 
his or her life. Inflation-indexed annuity—Provides monthly benefit 
payments guaranteed for life that increase to keep up with inflation. 
Annual increases may be cost-of-living increases or linked to the 
Consumer Price Index. 

Variable annuity: Provides monthly benefit payments guaranteed for life 
that may increase or decrease based on performance of underlying 
investments the purchaser selects. 

Deferred annuity: Monthly benefit payments are purchased over time but 
are not scheduled to begin until a person retires and then are 
guaranteed for life. 

Longevity annuity: A type of deferred annuity generally purchased at 
the time of retirement that provides a guaranteed stream of income 
typically starting after a late age, such as 85. End of text box] 

Although retirement experts agree that annuities can reduce longevity 
risk and complex decision making about how to draw down retirement 
assets over time, the annuity market faces challenges. In the private 
market, people who buy individual annuities tend to be those who expect 
to live longer than average. A person who chooses to purchase an 
annuity may have information about his or her health, habits, or family 
history that the insurance company does not have regarding their risk 
of living longer than average. This phenomenon, called “adverse 
selection,” leads to higher annuity premiums than insurers would 
otherwise have to charge if the longevity risk were spread over the 
entire population so that gains from early deaths would be aggregated 
with longer than average lives, for cost purposes. Two proposals seek 
to overcome this challenge by increasing the number and type of workers 
that purchase annuities and providing access to group rates, which tend 
to be lower than rates for individual annuities.

Automatic Trial Income. Retirees with DC plans would have a substantial 
portion of their account balance directed into a 2-year trial annuity 
when they retire unless they affirmatively choose to opt out.[Footnote 
77] After the 2-year period, the trial annuity would convert to a 
permanent one unless the retiree made an affirmative decision to take a 
lump-sum distribution instead. Employers could contract with insurance 
companies to provide the trial and permanent annuity products to 
workers at group rates. Employers also select the types of annuity 
products that would be offered to their workers, for example, annuities 
that are adjusted for inflation. 

Security "Plus" Annuity. Workers with DC plans have a one-time 
opportunity during their first year of retirement to purchase a basic 
life annuity, of up to $100,000.[Footnote 78] The annuity is intended 
to be low cost, simple, widely available, and easy to understand and 
purchase. Annuities are purchased from private sector insurance 
companies at group prices through a program facilitated by the federal 
government. Through a competitive bidding process, the federal 
government pre-selects a private market annuity provider to underwrite 
Security "Plus" annuities on a group basis. The federal government 
provides record-keeping, marketing, distribution and other 
administrative services and pays out annuity benefits with Social 
Security benefits. The basic annuities are a single life annuity for 
single retirees and a joint-and-survivor annuity for married retirees. 
Whether or not the annuities are adjusted for inflation or offer other 
features depends on the willingness and ability of the insurance 
companies to offer them. 

Proposals also Pose Trade-offs for Workers and Employers: 

The approaches the proposals use to address risks present trade-offs 
and costs for workers and employers, and in some cases the federal 
government. In particular, important trade-offs and concerns arise with 
mandating coverage and contributions, guaranteeing investment returns, 
using life cycle funds, and annuitizing benefits. Trade-offs also arise 
with approaches to prohibiting preretirement benefit leakage, 
centralizing the private pension system, and changing existing tax 
incentives for contributing to DC plans. 

Mandates: 

Mandating employers to provide retirement benefits or workers to 
participate and contribute to a pension plan, as the GRA does, ensures 
that most, if not all, workers will have some level of retirement 
income beyond Social Security; however, such mandates also can pose 
burdens for some workers and employers.[Footnote 79] Several retirement 
experts and industry professionals we spoke to, including one who would 
not support the use of mandates in practice, said that making 
participation mandatory is a way to increase retirement plan coverage. 
However, such mandates represent a significant departure from the 
existing voluntary private pension system in the United States, and 
several retirement experts said that their adoption may not be 
feasible.[Footnote 80] Furthermore, requiring workers and employers to 
contribute to any type of pension plan diverts funds from other uses, 
including employers' business expenses and workers' competing demands 
for basic necessities. For example, employers may pass on the cost of 
contributing to a pension plan by reducing workers' current 
compensation. The impact of this diversion may be disproportionately 
greater for lower-income workers and small businesses whose financial 
resources are more constrained. 

On the other hand, voluntary approaches to increasing coverage and 
contribution rates allow individual workers and employers to choose 
whether or not to participate in a pension plan but, as the current 
system illustrates, cannot ensure that all workers will be covered by a 
pension plan. Several retirement experts have noted that voluntary 
approaches that change the decision-making framework, such as an auto- 
enrollment approach that allows workers to opt out, default 
contribution levels, and automatic contribution escalation, as used in 
the Super Simple and Universal 401(k) plans, overcome workers' inertia 
because they do not require active decision making about the extent of 
their participation and are effective alternatives to a mandate. 
However, increasing participation also may increase costs for employers 
that contribute to DC plans because now they would be making 
contributions for a greater number of workers, unless they reduced the 
amount of their contributions to all workers to keep the total cost the 
same. In addition, because such approaches are still voluntary, some 
workers will continue to lack coverage or contribute too little. 

Guarantees: 

Guaranteeing investment returns, an approach used in the GRA and New 
Benefit Platform proposals, also has advantages and disadvantages. A 
guarantee can protect workers from market fluctuations and can ensure a 
minimum level of benefit. In the short term, particularly when stock 
market investment returns are negative, guarantees can protect workers' 
pension plan balances from significant losses and, depending on their 
design, can also protect benefits from being eroded by inflation. 
However, guaranteeing investment returns raises several issues related 
to its design and cost. A key consideration is determining who will be 
responsible for providing the guarantee. The provider could be from the 
private sector, for example an insurance company or a Benefit 
Administrator as in the New Benefit Platform proposal, or the federal 
government could provide the guarantee as the GRA plan proposes. 
Additionally, what the guarantee covers and the level at which it is 
set is a key design factor that can have a significant impact on its 
cost and its effectiveness. For example, the higher the level of the 
guarantee, the more costly it could be. However, higher guarantees can 
also be more effective at protecting workers from market fluctuations. 
Conversely, setting guarantees at lower levels, while potentially 
cheaper, does not offer workers as much protection. The guarantee would 
have to be set at a level that the provider is able to sustain or it 
may result in significant governmental costs. 

Additional issues raised in designing a guarantee include what to do 
with surpluses, if any, realized from investment returns that exceed 
the guarantee level and how to fund shortfalls when investment returns 
are lower than that level. For example, the guarantee's provider could 
save surpluses and use them to cover shortfalls or pass the surplus 
returns on to workers. While passing the surplus on to workers 
increases their pension benefits, it also leaves less available for 
shortfalls and could deplete the surplus more quickly, potentially 
increasing the guarantee provider's costs. One way for the provider to 
manage this cost is to design the guarantee in a way that allows it to 
lower the level of the guarantee in the event of a protracted period of 
low investment returns, as the GRA plan proposes. However, lowering the 
guarantee also could reduce workers' and employers' confidence in the 
pension plan. Alternatively, the provider could pass on this cost to 
plan participants, or if the government provides the guarantee, 
taxpayers. 

Life Cycle Funds: 

Another approach used to address investment risk in DC plans, life 
cycle funds, also has strengths and weaknesses. While industry 
officials told us that life cycle funds are an important step forward 
in reducing the complexity of individual decision making about 
appropriate investment allocations, they also said they are not a 
complete solution and are still evolving. Workers still bear investment 
risk individually and recent experiences show that this risk may be 
substantial. For example, life cycle funds with a target retirement 
date of 2010 are reported to have lost 25 percent of their value on 
average in 2008, just 2 years before workers investing in them plan to 
retire. Officials at one retirement policy organization told us that 
one of the challenges life cycle funds face is striking the right 
balance between providing a steady stream of income in the near term 
and obtaining sufficient investment returns to address longevity and 
inflation risks in the long term. 

Annuities: 

Trade-offs also exist with using annuities to distribute benefits 
accumulated in DC plans during retirement. Annuities are advantageous 
because they provide a stable and predictable stream of income that is 
guaranteed to last retirees for the rest of their lives and reduce the 
burden of actively managing the drawdown of benefits. However, many 
retirement experts have noted their drawbacks, including their costs. A 
key concern is that some annuitants may die early in their retirement 
and will not realize much benefit from their purchase. This also raises 
equity issues about annuities, as those in certain income groups tend 
to live longer than others and women tend to live longer than men. 
While annuities by their nature depend on such differences to spread 
risks among a large pool of retirees, mandating annuities for groups 
which have lower average life expectancies, such as low income workers, 
raises questions about fairness. Also, annuitants no longer have access 
to their assets in the event of an emergency and generally cannot leave 
a bequest to their heirs. While retirees could choose to annuitize a 
portion of the account balance (which would provide a lower monthly 
benefit) and leave the remainder as a lump sum that they could access 
in an emergency or leave to their heirs, insurance industry officials 
told us that not many people realize they have this option. 

Other Trade-offs: 

Other trade-offs arise in prohibiting leakage, centralizing the private 
pension system, and changing tax incentives. Prohibiting or further 
restricting leakage, as proposed in the Super Simple, Universal 401(k), 
and GRA plans, preserves the amount of retirement savings available for 
retirement and allows workers to accrue higher benefits in the long 
term than if they withdrew funds from their DC accounts early. However, 
retirement experts have noted that prohibiting hardship withdrawals and 
loans also can make workers worse off in the short term if they face a 
financial emergency, such as a pending home foreclosure, and do not 
have other savings to draw from. GAO has reported in the past that 
allowing the possibility of loans and hardship withdrawals provides a 
strong incentive for participation in a voluntary system, especially 
among low-to middle-income workers.[Footnote 81] In addition, loans 
that are repaid may not have an adverse effect on workers' retirement 
savings because the worker returns the money to the retirement account. 

As an alternative to the current employer-based system, centralizing 
the private pension system in either the private sector or the 
government has advantages such as facilitating portability and taking 
advantage of economies of scale to manage administrative costs. While 
establishing such a system may also reduce employers' administrative 
duties and, potentially, some of their individual fiduciary 
responsibilities, it may also be a costly and complex effort that 
requires new regulatory and oversight efforts. These costs could be 
passed on to workers, employers, and taxpayers in general. 

In addition, providing a government contribution or credit by expanding 
the Saver's Credit, as suggested in the Super Simple, Universal 401(k), 
and GRA proposals, increases retirement benefits for workers, but also 
increases costs for the government because more people would receive 
it. Reducing preferential tax treatment for contributions to DC plans, 
such as 401(k) plans, could partially offset this cost, as proposed in 
the GRA plan, however workers currently contributing more than the 
$5,000 limit to those plans would be made worse off. Some workers would 
have to pay income taxes on more of their earnings because the amount 
of the government's refundable tax credit to offset the cost of 
contributions is $600 for all workers regardless of their income or 
amount of their contribution. 

Options to Expand Coverage Substantially Increase Projected Benefits: 

Our microsimulation modeling projections, based on a sample of workers 
born in 1990, show that options to expand pension coverage considerably 
increase the amount of income available for retirement, especially for 
low-income workers.[Footnote 82] While there are various options that 
could be used to address a number of key risks workers face in 
accumulating and preserving pension benefits, we modeled three options 
to expand coverage to provide an example of how such changes might 
affect the amount of income available for retirement as compared to a 
baseline scenario reflecting current law and trends. These options 
incorporate some generic features of U.S. proposals, but do not 
represent any proposal in its entirety. The trade-offs these options 
entail are similar to those discussed above for mandatory and voluntary 
approaches to increasing coverage and contributions. The first option 
we model expands access to a DC plan for workers by requiring all 
employers that do not currently offer a pension plan to sponsor a DC 
plan with no employer contribution (i.e., universal access). The second 
and third options we model build on universal access by incorporating 
automatic enrollment and mandatory participation, respectively. While 
each option increases pension benefits and the percentage of workers 
with DC savings at retirement, mandatory participation in combination 
with universal access provides the largest overall gains compared to 
the baseline. Although these assumptions represent stylized scenarios, 
they illustrate the potential effect of such changes on coverage and 
benefits.[Footnote 83] 

[Text box: Modeling scenarios to expand coverage: 

Universal access--All employers that do not sponsor a plan are required 
to provide a DC plan with no employer contribution. Existing employer- 
sponsored plans are not affected. 

Universal access with automatic enrollment--In addition to universal 
access, as described above, all DC plans have automatic enrollment in 
which individuals must affirmatively opt out of participating in the 
plan. 

Universal access with mandatory participation--In addition to universal 
access, all workers with access to a DC plan are required to 
participate. End of text box] 

We project DC pension benefits for a stylized scenario where all 
employers that do not currently offer a pension plan are required to 
sponsor a DC plan with no employer contribution (universal access). 
Requiring universal access where participation is voluntary increases 
the share of workers with DC savings at retirement from about 67 
percent to just over 79 percent (see table 12). The increase in 
coverage is greatest for low-income workers--the share of workers with 
DC savings at retirement increases from about 48 percent to about 63 
percent for those in the first income quartile, an increase of about 
one-third. Overall, requiring universal access increases the average 
amount of annual income in retirement provided by a DC plan, as 
measured by the annuity equivalent, by about 12 percent. 

Table 12: Projected Average Household Annuity Equivalents and Projected 
Percentage of Workers with DC Savings at Retirement, by Income, under 
Different Scenarios: 

Baseline results: Household annuity equivalent (per year, 2008 
dollars); 
By income quartile: Overall: $15,217; 
By income quartile: 1: $2,761; 
By income quartile: 2: $7,780; 
By income quartile: 3: $16,331; 
By income quartile: 4: $33,996. 

Baseline results: Percentage of workers with DC savings at retirement; 
By income quartile: Overall: 66.9%; 
By income quartile: 1: 47.5%; 
By income quartile: 2: 64.6%; 
By income quartile: 3: 74.3%; 
By income quartile: 4: 81.3%. 

Universal access: Household annuity equivalent (per year, 2008 
dollars); 
By income quartile: Overall: $17,058; 
By income quartile: 1: $3,211; 
By income quartile: 2: $8,943; 
By income quartile: 3: $18,614; 
By income quartile: 4: $37,465. 

Universal access: Percentage of workers with DC savings at retirement; 
By income quartile: Overall: 79.2%; 
By income quartile: 1: 62.9%; 
By income quartile: 2: 78.4%; 
By income quartile: 3: 85.8%; 
By income quartile: 4: 89.8%. 

Universal access with auto-enrollment: Household annuity equivalent 
(per year, 2008 dollars); 
By income quartile: Overall: $18,556; 
By income quartile: 1: $3,921; 
By income quartile: 2: $10,276; 
By income quartile: 3: $20,340; 
By income quartile: 4: $39,668. 

Universal access with auto-enrollment: Percentage of workers with DC 
savings at retirement; 
By income quartile: Overall: 90.6%; 
By income quartile: 1: 84.3%; 
By income quartile: 2: 90.4%; 
By income quartile: 3: 93.1%; 
By income quartile: 4: 94.6%. 

Universal access with mandatory participation: Household annuity 
equivalent (per year, 2008 dollars); 
By income quartile: Overall: $21,312; 
By income quartile: 1: $5,157; 
By income quartile: 2: $12,367; 
By income quartile: 3: $23,461; 
By income quartile: 4: $44,260. 

Universal access with mandatory participation: Percentage of workers 
with DC savings at retirement[A]; 
By income quartile: Overall: 96.6%; 
By income quartile: 1: 95.6%; 
By income quartile: 2: 96.5%; 
By income quartile: 3: 97.0%; 
By income quartile: 4: 97.2%. 

Source: GAO calculations of PENSIM simulation. 

Note: Some of the model assumptions include the following: (1) workers 
use all accumulated DC plan balances to purchase an inflation-adjusted 
annuity at retirement, between ages 62 and 70; (2) participants invest 
all plan assets in life cycle funds; (3) stocks earn an average annual 
2.9 percent real return. Quartiles are based on the distribution of 
lifetime earnings. No default or minimum contribution rates were 
specifically defined for the three scenarios, rather the contribution 
rates are produced by PENSIM in the same manner as they are for those 
who voluntarily participate in the baseline scenario. We have no 
evidence on what contribution rates new participants would choose under 
the three scenarios we analyzed, but it may be lower than the 
contribution rates chosen by those that voluntarily participate in the 
baseline scenario. See appendix I for more details. 

[A] Our modeling assumptions do not alter current standards for 
eligibility. Thus, under universal access with mandatory participation, 
some workers, such as part-time workers who work less than 1,000 hours 
a year, may not be eligible for pension coverage according to plan 
provisions. 

[End of table] 

Under the second scenario, automatic enrollment is added as an 
additional requirement for all DC plans and further raises projected DC 
pension coverage and benefits. Combining the requirement for universal 
access to a plan with automatic enrollment where workers can opt out of 
coverage increases the share of workers with DC savings at retirement 
to almost 91 percent. The largest increase occurs for those in the 
lowest earnings quartile--the share of workers with DC savings at 
retirement increases from about 63 percent under universal access to 
just over 84 percent under universal access with automatic enrollment. 
Overall, average projected DC pension income further increases to 
$18,556 a year. 

Finally, we model a third scenario in which, in addition to universal 
access, all workers with a DC plan are required to participate. Our 
simulations show that, of the three options modeled, mandatory 
participation provides the largest overall gains compared to the 
baseline in the percentage of workers with savings at retirement and 
the amount of pension benefits. For each income quartile, the share of 
workers with DC savings at retirement increases to more than 95 
percent.[Footnote 84] The biggest gain occurs for low-income workers-- 
the share of workers with DC savings at retirement increases from 84 
percent under universal access with automatic enrollment to almost 96 
percent under mandatory participation. Accordingly, the average amount 
of DC pension income available in retirement further increases by about 
15 percent overall compared to universal access with automatic 
enrollment. Unsurprisingly, among low-income workers, average DC 
pension income increases by about 32 percent with universal access and 
mandatory participation compared to universal access with automatic 
enrollment. 

Concluding Observations: 

The current financial crisis clearly illustrates the need to make the 
employer-sponsored pension system more secure, but even in good 
economic times many U.S. workers are exposed to numerous risks. Despite 
significant tax incentives, only about 50 percent of the private sector 
workforce is covered by a retirement plan. Employers continue to freeze 
and terminate traditional DB plans. For workers who have access to a DC 
plan, account balances are low, even for many of those close to 
retirement. Many experts agree reforms are needed to make the U.S. 
private pension system more effective in protecting workers from risks 
to accumulating and preserving adequate savings for retirement. If no 
action is taken, a considerable number of Americans face the prospect 
of a reduced standard of living in retirement. 

The international systems and domestic proposals we reviewed represent 
different approaches to addressing key retirement risks and point the 
way toward possible solutions to some of the problems faced by the U.S. 
pension system. For example, alternative models could be used to 
distribute investment risks across workers, employers, and retirees, 
which may reduce the volatility workers face with self-directed 
individual accounts. In the current economic environment, approaches 
used in other countries and domestic proposals to address risks workers 
face in accumulating and preserving pension benefits may warrant 
consideration. However, new approaches raise a number of issues that 
would have to be addressed, including the relative roles of workers, 
employers, and the government, particularly with regard to 
contributions, how such a system would be administered, and its 
relationship to both Social Security and the existing private pension 
system. 

Neither the pension systems in other countries we reviewed, nor the 
domestic proposals constitute a panacea for the challenges of the U.S. 
pension system. No system or proposal is perfect and each requires 
careful consideration of the trade-offs between its advantages, costs, 
and responsibilities. Despite important social, economic, and 
institutional differences between the United States and these 
countries, key features from these models, as well as the domestic 
proposals, are relevant and could potentially offer some solutions for 
the U.S. pension system. Taken together, these key features could be 
used to more comprehensively address risks workers face. The challenge 
for Congress will be to balance the interests and responsibilities of 
workers, employers, and the government and find the most promising 
steps to help Americans achieve retirement security. 

Agency Comments and Our Evaluation: 

We obtained technical comments on a draft of this report from the 
Department of Labor and the Department of the Treasury, and 
incorporated them throughout the report, as appropriate. The Department 
of State did not have any comments on the draft report. 

As agreed with your office, unless you publicly announce it contents 
earlier, we plan no further distribution of this report until 30 days 
after its issue date. At that time, we will send copies of this report 
to the Secretary of Labor, Secretary of the Treasury, and Secretary of 
State. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-7215. Contact points for our offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made key contributions to this 
report are listed in appendix IV. 

Sincerely yours, 

Signed by: 

Barbara Bovbjerg: 
Director, Education, Workforce, and Income Security: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify key risks workers face from traditional defined benefit 
(DB) and defined contribution (DC) plans, we reviewed the relevant 
research and interviewed industry experts, pension consulting firms, 
academics, and other relevant organizations. The scope of this study is 
limited to risks workers face that are directly related to their 
pension benefits and does not focus on other significant but more 
indirect risks to retirement security, such as retiree health care 
costs. In addition, while we also acknowledge the importance of 
analyzing risks facing certain subpopulations, such as specific 
minority groups, the study does not include specific discussions of 
such subpopulations. There was broad consensus among those we 
interviewed that we correctly identified the key risks that workers 
face, within the scope of our study. We developed a framework for 
analysis based on the key risks we identified and applied it when 
conducting our analysis for the second and third research questions. 

To identify approaches used in other countries that could address risks 
in the U.S. pension system and the trade-offs they entail, we examined 
the employer-sponsored pension systems of three countries: the 
Netherlands, Switzerland, and the United Kingdom. We selected these 
countries after completing an initial review of employer-sponsored 
pension plan designs in Organisation for Economic Co-operation and 
Development (OECD) countries. We focused on OECD countries in order to 
increase our opportunity to identify practices used in countries with 
well-developed capital markets and regulatory regimes comparable, if 
not always similar, to the United States. We acknowledge that there may 
be relevant plan design features from a non-OECD country that we did 
not address in this report. We identified 13 OECD countries based on 
interviews with pension experts, including the OECD, and our review of 
retirement-related research. We then examined the key pension plan 
design features of each of the 13 country's private pension systems and 
selected 3 based on the following criteria: 

* The private pension system was identified through our research and 
the consensus of external experts as having strong potential for 
yielding useful lessons for the U.S. experience. 

* The private pension system is an important pillar of the country's 
retirement system. 

* The private pension system directly addresses the risks identified in 
the first research question. The selected countries as a group address 
all of our key risk areas, although no single country was required to 
address all of them. 

* The private pension system is not duplicative. Where similar plans 
exist in multiple countries, we chose the one that best addresses the 
other selection criteria and provided travel efficiencies for the job. 

To identify the approaches used in the employer-sponsored pension 
systems of the Netherlands, Switzerland, and the United Kingdom we 
analyzed how each country's plan design addresses the risks that 
workers face, using the risk framework developed in the first research 
question. Although we did not independently analyze each country's laws 
and regulations, we collected information about each country's plan 
design and identified potential lessons for the United States by 
reviewing available documentation and research and interviewing pension 
experts and government officials in each country. We recognize that 
some of the design details are still being developed for the United 
Kingdom's new system, scheduled to be implemented in 2012. We also 
interviewed academics and other experts based in the United States 
about each plan's strengths and weaknesses, the trade-offs it entails, 
and potential lessons it could provide for the United States. In 
addition, our analysis recognized that the applicability of lessons 
learned from these countries' plan designs is shaped by the public 
retirement systems and other social welfare supports in each country 
and we considered these contextual differences. 

To identify the approaches that key proposals for alternative pension 
plan designs in the United States use to address the risks that workers 
face, we analyzed four domestic proposals against the risk framework 
developed in the first research question. We selected the four 
proposals from a larger group that we identified by reviewing 
retirement-related research and conducting interviews with pension 
consulting firms, national experts, and other relevant organizations. 
We assessed the group against the following selection criteria and 
selected those proposals that met each of them: 

* The proposal has been identified through our research and the 
consensus of external experts as a major proposal. 

* The proposal directly addresses the risks identified in the first 
research question; the selected proposals as a group address all the 
major risk areas, although no single proposal was required to address 
all of them. 

* The proposal is from a source that GAO and external experts judge to 
be credible, such as universities and policy research organizations 
with demonstrated expertise in retirement issues. 

* The proposal is presented as a formal proposal, as opposed to a 
partial or preliminary reform idea. 

* The proposal is current (i.e., proposed or considered in the last 5 
years and not already adopted for use in the United States). 

* The proposal is not duplicative. When similar proposals were 
identified, we selected the one that best addressed the other selection 
criteria. 

We reviewed each proposal in its entirety and interviewed each of the 
authors to determine how the proposal addresses the risks areas we 
identified. Our review of the proposals focuses primarily on their 
approaches to address risks, although each proposal includes additional 
information that is beyond the scope of our report. We also clarified 
certain information about each proposal during interviews with the 
authors, including its trade-offs and the legal or administrative 
changes it would require. We also reviewed related research about the 
general approaches used in the proposals and interviewed national 
retirement policy experts about these approaches. In addition, we 
assessed two other proposals that specifically focused on increasing 
the use of annuities. We reviewed each of those proposals in their 
entirety and interviewed their authors to clarify details of those 
proposals. 

To analyze how certain options for pension reform may affect coverage 
and benefits, we used the Policy Simulation Group's (PSG) 
microsimulation models to run various simulations of workers saving in 
DC plans over a career. The PSG Pension Simulator (PENSIM) is a pension 
policy simulation model that has been developed for the Department of 
Labor to analyze lifetime coverage and adequacy issues related to 
employer-sponsored pensions in the United States. It has been used by 
GAO, the Department of Labor, other government agencies, and private 
organizations to analyze lifetime coverage and adequacy issues related 
to employer-sponsored pensions in the United States[Footnote 85] We 
projected account balances at retirement for PENSIM-generated workers 
under different scenarios representing different pension features and 
market assumptions. These features are used in some of the proposals we 
reviewed but do not represent any proposal in its entirety. See below 
for further discussion of PENSIM and our assumptions and methodologies. 

Methodology and Assumptions Using PENSIM Microsimulation Model: 

To project lifetime savings in DC pensions and to identify the effects 
of certain changes in policies, we used PENSIM.[Footnote 86] PENSIM is 
a dynamic microsimulation model that produces life histories for a 
sample of individuals born in the same year.[Footnote 87] The life 
history for a sample individual includes different life events, such as 
birth, schooling events, marriage and divorce, childbirth, immigration 
and emigration, disability onset and recovery, and death. In addition, 
a simulated life history includes a complete employment record for each 
individual, including each job's starting date, job characteristics, 
pension coverage and plan characteristics, and ending date. The model 
has been developed by PSG since 1997 with funding and input by the 
Office of Policy and Research at the Employee Benefits Security 
Administration (EBSA) of the U.S. Department of Labor with 
recommendations of the National Research Council panel on retirement 
income modeling. 

PENSIM simulates the timing for each life event by using data from 
various longitudinal data sets to estimate a waiting-time model (often 
called a hazard function model) using standard survival analysis 
methods. PENSIM incorporates many such estimated waiting-time models 
into a single dynamic simulation model. This model can be used to 
simulate a synthetic sample of complete life histories. PENSIM employs 
continuous-time, discrete-event simulation techniques, such that life 
events do not have to occur at discrete intervals, such as annually on 
a person's birthday. PENSIM also uses simulated data generated by 
another PSG simulation model, SSASIM, which produces simulated macro- 
demographic and macroeconomic variables. 

PENSIM imputes pension characteristics using a model estimated with 
1996 to 1998 establishment data from the Bureau of Labor Statistics 
Employee Benefits Survey (now known as the National Compensation 
Survey, or NCS). Pension offerings are calibrated to historical trends 
in pension offerings from 1975 to 2005, including plan mix, types of 
plans, and employer matching. Further, PENSIM incorporates data from 
the 1996-1998 Employee Benefits Survey to impute access to and 
participation rates in DC plans in which the employer makes no 
contribution, which the Bureau of Labor Statistics does not report as 
pension plans in the NCS. The inclusion of these "zero-matching" plans 
enhances PENSIM's ability to accurately reflect the universe of pension 
plans offered by employers. The baseline PENSIM assumption, which we 
adopted in our analysis, is that 2005 pension offerings, included the 
imputed zero-matching plans, are projected forward in time. 

PSG has conducted validation checks of PENSIM's simulated life 
histories against both historical life history statistics and other 
projections. Different life history statistics have been validated 
against data from the Survey of Income and Program Participation 
(SIPP), the Current Population Survey (CPS), Modeling Income in the 
Near Term (MINT3), the Panel Study of Income Dynamics (PSID), and the 
Social Security Administration's Trustees Report. PSG reports that 
PENSIM life histories have produced similar annual population, taxable 
earnings, and disability benefits for the years 2000 to 2080 as those 
produced by the Congressional Budget Office's long-term social security 
model (CBOLT) and as shown in the Social Security Administration's 2004 
Trustees Report. According to PSG, PENSIM generates simulated DC plan 
participation rates and account balances that are similar to those 
observed in a variety of data sets. For example, measures of central 
tendency in the simulated distribution of DC account balances among 
employed individuals is similar to those produced by an analysis of the 
Employee Benefit Research Institute-Investment Company Institute 401(k) 
database and of the 2004 Survey of Consumer Finances. GAO performed no 
independent validation checks of PENSIM's life histories or pension 
characteristics. 

In 2006, EBSA submitted PENSIM to a peer review by three economists. 
The economists' overall reviews ranged from highly favorable to highly 
critical. While the economist who gave PENSIM a favorable review 
expressed a "high degree of confidence" in the model, the one who 
criticized it focused on PENSIM's reduced form modeling. This means 
that the model is grounded in previously observed statistical 
relationships among individuals' characteristics, circumstances, and 
behaviors, rather than on any underlying theory of the determinants of 
behaviors, such as the common economic theory that individuals make 
rational choices as their preferences dictate and thereby maximize 
their own welfare. The reduced form modeling approach is used in 
pension microsimulation models and the feasibility of using a 
nonreduced-form approach to build such a model may be questionable 
given the current state of economic research. The third reviewer raised 
questions about specific modeling assumptions and possible overlooked 
indirect effects. 

Assumptions Used in Projecting DC Plan Balances at Retirement: 

PENSIM allows the user to alter one or more inputs to represent changes 
in government policy, market assumptions, or personal behavioral 
choices and analyze the subsequent impact on pension benefits. Starting 
with a 2 percent sample of a 1990 cohort, totaling 126,518 people at 
birth, our baseline simulation includes some of the following key 
assumptions and features. For our report, we focus exclusively on 
accumulated balances in DC plans and ignore any benefits an individual 
might receive from DB plans or from Social Security. Our reported 
benefits therefore capture just one source of potential income 
available to a retiree. 

* Workers accumulate DC pension benefits from past jobs in one rollover 
account, which continues to receive investment returns, along with any 
benefits from a current job. At retirement, these are combined into one 
account. Because we focus on DC plan balances only, we do not track 
Social Security benefits or benefits from DB plans. 

* Plan participants invest all assets in their account in life cycle 
funds, which adjust the mix of assets between stocks and government 
bonds as the individual ages. Stocks return an annual non-stochastic 
real rate of return of 2.9 percent, equivalent to the government bond 
rate. In an alternate simulation, we assume that stocks earn an annual 
non-stochastic real rate of return of 4.9 percent and find similar 
effects for each policy option (see table 13).[Footnote 88] Using 
different rates of return reflect assumptions used by the Social 
Security Administration's Office of the Chief Actuary in some of its 
analyses of trust fund investment. 

Table 13: Projected Average Household Annuity Equivalents and Projected 
Percentage of Workers with DC Savings at Retirement, by Income, under 
Different Scenarios: 

Baseline results: Household annuity equivalent (per year, 2008 
dollars); 
By income quartile: Overall: $18,081; 
By income quartile: 1: $3,351; 
By income quartile: 2: $9,344; 
By income quartile: 3: $19,397; 
By income quartile: 4: $40,231. 

Baseline results: Percentage of workers with DC savings at retirement; 
By income quartile: Overall: 67.1%; 
By income quartile: 1: 47.6%; 
By income quartile: 2: 64.8%; 
By income quartile: 3: 74.5%; 
By income quartile: 4: 81.5%. 

Universal access: Household annuity equivalent (per year, 2008 
dollars); 
By income quartile: Overall: $20,228; 
By income quartile: 1: $3,882; 
By income quartile: 2: $10,686; 
By income quartile: 3: $22,031; 
By income quartile: 4: $44,311. 

Universal access: Percentage of workers with DC savings at retirement; 
By income quartile: Overall: 79.4%; 
By income quartile: 1: 63.2%; 
By income quartile: 2: 78.6%; 
By income quartile: 3: 86.0%; 
By income quartile: 4: 90.0%. 

Universal access with auto-enrollment: Household annuity equivalent 
(per year, 2008 dollars); 
By income quartile: Overall: $22,087; 
By income quartile: 1: $4,773; 
By income quartile: 2: $12,305; 
By income quartile: 3: $24,206; 
By income quartile: 4: $47,065. 

Universal access with auto-enrollment: Percentage of workers with DC 
savings at retirement; 
By income quartile: Overall: 90.7%; 
By income quartile: 1: 84.4%; 
By income quartile: 2: 90.5%; 
By income quartile: 3: 93.2%; 
By income quartile: 4: 94.7%. 

Universal access with mandatory participation: Household annuity 
equivalent (per year, 2008 dollars); 
By income quartile: Overall: $25,672; 
By income quartile: 1: $6,354; 
By income quartile: 2: $15,028; 
By income quartile: 3: $28,166; 
By income quartile: 4: $53,137. 

Universal access with mandatory participation: Percentage of workers 
with DC savings at retirement[A]; 
By income quartile: Overall: 96.7%; 
By income quartile: 1: 95.7%; 
By income quartile: 2: 96.6%; 
By income quartile: 3: 97.1%; 
By income quartile: 4: 97.3%. 

Source: GAO calculations of PENSIM simulation. 

Note: Model assumptions include the following: (1) workers use all 
accumulated DC plan balances to purchase an inflation-adjusted annuity 
at retirement, between ages 62 and 70; couples separately purchase 
individual life annuities which are added together for the household 
annuity equivalent; (2) workers invest all plan assets in life cycle 
funds; (3) stocks earn an average annual 4.9 percent real return, 
except where specified. Quartiles are based on the distribution of 
lifetime earnings. No default or minimum contribution rates were 
specifically defined for the three scenarios, rather the contribution 
rates are produced by PENSIM in the same manner as they are for those 
who voluntarily participate in the baseline scenario. We have no 
evidence on what contribution rates new participants would choose under 
the three scenarios we analyzed, but it may be lower than the 
contribution rates chosen by those that voluntarily participate in the 
baseline scenario. 

[A] Our modeling assumptions do not alter current standards for 
eligibility. Thus, under universal access with mandatory participation 
some workers, such as part-time workers who work less than 1,000 hours 
a year, may not be eligible for pension coverage according to plan 
provisions. 

[End of table] 

* Workers purchase a single, inflation-adjusted life annuity, typically 
at retirement, which occurs between the ages of 62 and 70.[Footnote 89] 
Anyone who becomes permanently disabled at age 45 or older also 
purchases an immediate annuity at their disability age.[Footnote 90] We 
eliminate from the sample cohort members who: (1) die before they 
retire, at whatever age; (2) immigrate into the cohort at an age older 
than 25; (3) emigrate prior to retirement; or (4) become permanently 
disabled prior to age 45.[Footnote 91] 

Starting from this baseline model, we vary key inputs and assumptions 
to see how these variations affect pension coverage and benefits at 
retirement. Scenarios we analyzed include: 

1. Universal access. Existing employer plans stay as they are in the 
baseline simulation, but all employers that did not sponsor a plan are 
required to provide a DC plan with no employer contribution. 
Participation and employee contributions for those who newly have 
access are based on current model assumptions regarding participation 
in employer-sponsored DC plans with no employer contribution. 

2. Universal access with automatic enrollment. In addition to universal 
access, as described above, all DC plans have automatic enrollment 
where individuals must affirmatively opt out of participating in the 
plan. 

3. Universal access with mandatory participation. In addition to 
universal access, all workers with access to a DC plan are required to 
participate (i.e., no opt out). 

PENSIM Cohort Summary and Cross-Sectional Statistics: 

Lifetime summary statistics of the simulated 1990 cohort's workforce 
and demographic variables give some insight into the model's projected 
DC benefits at retirement that we report (see table 14). By restricting 
the sample to those who have some earnings, do not immigrate into the 
cohort after age 25, emigrate prior to retirement, and retire (or 
become disabled at age 45 or older), we reduce the full sample of 
126,518 individuals to a sample of 66,859 individuals. 

Table 14: Sample Summary Statistics, PENSIM 1990 Cohort, Medians: 

Demographic and workforce variables: Percentage female (average); 
Sample: (n = 66,859): 52; 
By income quartile: 1: 64; 
By income quartile: 2: 54; 
By income quartile: 3: 49; 
By income quartile: 4: 41. 

Demographic and workforce variables: Education; 
Sample: Some college; 
By income quartile: 1: High school graduate; 
By income quartile: 2: High school graduate; 
By income quartile: 3: Some college; 
By income quartile: 4: College degree. 

Demographic and workforce variables: Years working full time; 
Sample: 29.8; 
By income quartile: 1: 20.2; 
By income quartile: 2: 29.1; 
By income quartile: 3: 31.4; 
By income quartile: 4: 34.0. 

Demographic and workforce variables: Years working part time; 
Sample: 2.2; 
By income quartile: 1: 6.3; 
By income quartile: 2: 2.4; 
By income quartile: 3: 1.5; 
By income quartile: 4: 0.8. 

Demographic and workforce variables: Steady earnings (annual, 2008 
dollars); 
Sample: $46,838; 
By income quartile: 1: $20,070; 
By income quartile: 2: $40,071; 
By income quartile: 3: $65,508; 
By income quartile: 4: $124,510. 

Demographic and workforce variables: Number of jobs over lifetime; 
Sample: 5; 
By income quartile: 1: 5; 
By income quartile: 2: 5; 
By income quartile: 3: 5; 
By income quartile: 4: 5. 

Demographic and workforce variables: Duration of longest job, years; 
Sample: 17.4; 
By income quartile: 1: 14.7; 
By income quartile: 2: 17.3; 
By income quartile: 3: 18.2; 
By income quartile: 4: 19.1. 

Demographic and workforce variables: Retirement age; 
Sample: 63; 
By income quartile: 1: 63; 
By income quartile: 2: 63; 
By income quartile: 3: 63; 
By income quartile: 4: 63. 

Demographic and workforce variables: Years eligible for a DC plan; 
Sample: 18.8; 
By income quartile: 1: 11.3; 
By income quartile: 2: 17.8; 
By income quartile: 3: 21; 
By income quartile: 4: 24.1. 

Source: GAO calculations of PENSIM simulation. 

[End of table] 

[End of section] 

Appendix II: Examples from Private Sector Pension Systems in the United 
Kingdom, the Netherlands, and Switzerland: 

Example of How a Worker Accumulates Pension Benefits in the United 
Kingdom: 

This example is based on the Personal Accounts plan, a type of DC plan. 
Key design features of the Personal Accounts plan include: automatic 
enrollment, mandatory minimum contributions, default investment 
allocations, and annuities with a lump-sum option. 

* A 22-year-old worker takes a job with a small employer that does not 
have its own pension plan. The employer automatically enrolls the 
worker into a Personal Accounts plan. The worker chooses not to opt out 
of the plan. 

* For the specified earnings band, the employer deducts 4 percent of 
the worker's earnings from her paycheck and deposits them into her 
Personal Accounts plan because the worker has chosen not to contribute 
more than the mandatory minimum amount. The employer also makes its 
mandatory minimum contribution equal to 3 percent of the worker's 
earnings into her account. The government also effectively contributes 
an amount equal to 1 percent of the worker's pay into her account 
through normal tax relief. 

* The worker does not make an active investment allocation so all 
contributions are invested into the default option. 

* Over the course of her career, the worker's benefits accumulate. She 
experiences investment gains and losses; the actual amount of the 
worker's contributions increase as her salary increases (although the 4 
percent contribution rate remains the same); the worker changes 
employers but keeps the same Personal Accounts plan and she and the new 
employer continue to contribute to it. The worker does not withdraw any 
of the accumulated benefits until she retires. 

* At age 65 the worker retires and has accumulated a retirement nest 
egg equal to the total contributions and investment earnings less 
investment losses and fees. The worker takes a lump-sum distribution 
equal to 25 percent of her account balance and annuitizes the remaining 
75 percent. The annuity provides the worker with a monthly pension 
benefit for the rest of her life. 

Example of a How a Worker Accumulates Pension Benefits in the 
Netherlands: 

This example is based on a typical career-average DB plan in the 
Netherlands which is negotiated between workers and employers. Key plan 
design features include: mandatory industry plan, contribution levels 
specified in the labor contract for this particular plan, pooled 
investments, conditional indexation in good and bad years, portability, 
and annuitization with conditional indexation. 

* A 25-year-old worker starts a job in an industry with a mandatory 
pension plan and becomes enrolled in the plan. 

* The worker and employer contribute to the plan in the amounts 
specified in the industry plan's agreement. Contributions for this 
specific industry plan (as negotiated by the worker and employer 
representatives) are: worker 5 percent of pay (one-fourth of total 
contribution); employer 15 percent of pay (three-fourths of total 
contribution) for a total of 20 percent of the worker's pay. 

* All the contributions to the plan are combined into a single pool and 
invested collectively. The pension fund's board decides how to invest 
the contributions. 

* The worker accrues benefits at the rate of 2 percent of earnings each 
year according to the plan rules negotiated by worker and employer 
representatives. 

* In years when the plan is sufficiently funded (e.g., when investment 
returns are high), accrued benefits are indexed (i.e., adjusted upward 
to reflect price and wage increases) in accordance with this particular 
plan's rules; in years when the plan is not sufficiently funded (e.g., 
investment returns are low), accrued benefits are partially indexed or 
not indexed at all. 

* Over the course of his career, the worker changes jobs but stays in 
the same pension plan because the jobs are all in the same industry. 
The new employer now contributes to the plan. 

* At age 65, the worker retires and has accrued pension benefits equal 
to 2 percent of his annual earnings multiplied by 40 years, with 
adjustments made for indexation. The accumulated benefits are paid out 
as an annuity that provides him with a monthly benefit for the rest of 
his life. As long as the plan is sufficiently funded, the annuity 
payments will be indexed (i.e., adjusted upward to reflect price and 
wage increases). 

Example of How a Worker Accumulates Pension Benefits in Switzerland: 

This example is based on a typical DB cash balance plan that meets the 
mandatory minimum requirements under Swiss law. Key features of the 
plan design include: mandatory coverage, mandatory minimum 
contributions that vary with age, minimum guaranteed returns on 
investment, full portability, annuitization of pension benefits at the 
mandatory minimum conversion rate, and a lump-sum option for drawing 
down benefits in retirement. 

* A 25-year-old worker starts a job with an employer that provides a 
pension plan which meets the mandatory minimum standards under Swiss 
law and becomes enrolled in the plan. 

* For the specified earnings band, the worker and employer contribute 
an amount equal to 7 percent of pay to the plan, the minimum amount 
required by law for a 25-year-old worker. Because the employer is 
required by law to make at least half of the contribution, it 
contributes 3.5 percent and the worker contributes the other 3.5 
percent by payroll deduction. The amount of the mandatory minimum 
required contribution will increase with the worker's age in accordance 
with the schedule below. 

* Ages 25-34: 7 percent of pay: 

* Ages 35-44: 10 percent of pay: 

* Ages 45-54: 15 percent of pay: 

* Ages 55-65: 18 percent of pay: 

* All the contributions to the plan are combined into a single pool and 
invested collectively. The pension fund's board decides how to invest 
the contributions within the guidelines established by the government. 

* The worker accrues benefits based on the amount of the contributions 
and the investment returns. This particular pension plan provides the 
minimum return on investment guaranteed by law. The mandatory minimum 
return is 2 percent this year, but was higher in past years and may 
vary in future years. 

* Over the course of his career, the worker changes jobs and the value 
of his accumulated benefits is calculated each time and transferred to 
his new employers' pension plans. 

* The worker retires at age 65 and has accumulated a retirement nest 
egg. Although he has the opportunity to take 25 percent of his nest egg 
as a lump sum he chooses to annuitize the entire amount. He also had 
the opportunity to withdraw funds prior to retiring when he bought his 
first home; he choose not to, and the nest egg equals the total value 
of all contributions made and the minimum investment returns guaranteed 
each year. The accumulated benefits are paid out as an annuity that 
provides him with a monthly benefit for the rest of his life. Each year 
his total benefits equal 7 percent of the total nest egg, in accordance 
with the mandatory minimum annuity conversion rate. In years when the 
pension plan's funding levels are sufficient, his pension benefits will 
also be indexed for inflation (i.e., adjusted upward). 

[End of section] 

Appendix III: Summary of Administrative and Legal Changes Associated 
with Key Domestic Proposals: 

Table 15: Administrative and Legal Changes Associated with Key Domestic 
Proposals for Alternative Pension Plan Designs: 

Proposal: Super Simple Saving Plan; 
Administrative and legal changes: 
* Employers not subject to annual nondiscrimination testing or 
reporting requirements; contribution levels monitored and enforced 
through the tax system; 
* Government matching contributions replace the Saver's Credit, but the 
authors leave the design of the match open for discussion. Match 
deposited directly in accounts through the tax system under a separate 
record-keeping system maintained by financial service providers; 
workers would not have to file taxes to receive the match; 
* Workers allowed to make higher contributions than under standard 
401(k) plans. Maximum combined contribution from the employer and 
worker together is $46,000; 
* All standard 403(b), SIMPLE, and Safe Harbor plans required to 
convert to Super Simples. Existing 401(k) plans grandfathered in, but 
401(k) plan sponsors could adopt the Super Simple by amending their 
plans. 

Proposal: A New Benefit Platform for Life Security; 
Administrative and 
legal changes: 
* Establish a centralized system of third-party Benefit Administrators 
in the private sector. Federal government establishes uniform service 
areas throughout the country for each of the plan's core benefits 
(retirement and health care); two or more Benefit Administrators would 
be available to every employer and individual worker; 
* Federal government establishes, or arranges for, a uniform national 
regulatory structure and uniform standards for the benefits included in 
the plan; 
* Current nondiscrimination rules would be replaced with simplified 
standards, including "safe harbor" designs; 
* Benefit Administrators will assume liability deemed appropriate for 
the benefits they provide but employers would still have some 
responsibility for monitoring the plan. 

Proposal: Universal 401(k) Plan; 
Administrative and legal changes: 
* Federal government establishes a federally chartered clearinghouse 
structure that sets-up and manages workers' accounts; 
* Saver's Credit made refundable and directly deposited into workers' 
accounts; Internal Revenue Service forwards the government match to 
individual accounts and reconciles workers' and employers' 
contributions with tax records. Workers receive the credit regardless 
of their tax liability; expanded on a sliding scale so that workers at 
higher income levels also receive government contributions; 
* Federal government facilitates annuity purchases, either by 
contracting with one or more private sector insurers or by managing the 
annuity payments through the Pension Benefit Guaranty Corporation. 

Proposal: Guaranteed Retirement Accounts Plan; 
Administrative and legal changes: 
* Federal government (Social Security Administration) establishes and 
administers a system of retirement savings accounts and manages and 
invests plan assets (Thrift Savings Plan or similar body) and 
guarantees a specified rate of return on the savings accounts; 
* Tax preferences for defined contribution plans, such as 401(k) plans 
and Individual Retirement Accounts are reduced and replaced by a 
uniform tax credit; tax-qualified contributions to DC plans would be 
reduced to $5,000 per year, adjusted for inflation; 
* State and local governments have to notify the federal government of 
marriages and divorces so that contributions can be apportioned evenly 
between husbands and wives; 
* State governments have to report who is receiving unemployment 
benefits to the federal government (Internal Revenue Service) so that 
those workers can receive the $600 tax credit. 

Source: GAO analysis of key domestic proposals for alternative pension 
plan designs. 

[End of table] 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Charles Jeszeck, Acting 
Director; Michael Collins, Assistant Director; Sharon Hermes and 
Annamarie Lopata, Analysts-in Charge; Meghan Hardy; Susan Aschoff; 
Seyda Wentworth; Joseph Applebaum; and Craig Winslow made key 
contributions to this report. 

[End of section] 

Related GAO Products: 

Defined Benefit Plans: Proposed Plan Buyouts by Financial Firms Pose 
Potential Risks and Benefits. [hyperlink, 
http://www.gao.gov/products/GAO-09-207]. Washington, D.C.: March 16, 
2009. 

Private Pensions: Low Defined Contribution Plan Savings May Pose 
Challenges to Retirement Security, Especially for Many Low-Income 
Workers. [hyperlink, http://www.gao.gov/products/GAO-08-08]. 
Washington, D.C.: November 29, 2007. 

Private Pensions: Changes Needed to Provide 401(k) Plan Participants 
and the Department of Labor Better Information on Fees. [hyperlink, 
http://www.gao.gov/products/GAO-07-21]. Washington, D.C.: November 16, 
2006. 

Private Pensions: Information on Cash Balance Pension Plans. 
[hyperlink, http://www.gao.gov/products/GAO-06-42]. Washington, D.C.: 
November 3, 2005. 

Highlights of a GAO Forum: The Future of the Defined Benefit System and 
the Pension Benefit Guaranty Corporation. [hyperlink, 
http://www.gao.gov/products/GAO-05-578SP]. Washington: D.C.: June 1, 
2005. 

Private Pensions: Implications of Conversions to Cash Balance Plans. 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-00-185]. Washington, 
D.C.: September 29, 2000. 

Cash Balance Plans: Implications for Retirement Income. [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-00-207]. Washington, D.C.: 
September 29, 2000. 

[End of section] 

Footnotes: 

[1] The Joint Committee on Taxation reported that federal tax 
expenditures for pension plans are estimated to be $98 billion in 2009. 
Federal tax expenditures consist of forgone tax revenue from deferrals 
on employer and employee contributions and investment earnings in 
qualified pension plans net of taxes paid on pension distributions. 

[2] PENSIM is a pension policy simulation model that has been developed 
for the Department of Labor to analyze lifetime coverage and adequacy 
issues related to employer-sponsored pensions in the United States. See 
appendix I for detailed information about the projections and input 
assumptions used to produce the results in this report. 

[3] See, for example, GAO Private Pensions: Low Defined Contribution 
Plan Savings May Pose Challenges to Retirement Security, Especially for 
Many Low-Income Workers, [hyperlink, 
http://www.gao.gov/products/GAO-08-8] (Washington, D.C.: Nov. 29, 2007) 
and Private Pensions: Information on Cash Balance Pension Plans, 
[hyperlink, http://www.gao.gov/products/GAO-06-42] (Washington, D.C.: 
Nov. 3, 2005). 

[4] DB plans offer benefits in the form of an annuity; however, a DB 
plan may also provide workers the option of receiving their benefits as 
a lump sum distribution. 

[5] Cash balance plans are referred to as hybrid plans because legally 
they are DB plans but contain certain features that resemble DC plans. 
As with traditional DB plans, employers that sponsor a cash balance 
plan make contributions to a pension trust fund that is invested on 
behalf of the employees in the plan. However, unlike traditional DB 
plans that express retirement benefits as an annuity amount calculated 
using years of service and earnings, cash balance plans express 
benefits as a hypothetical individual account balance that is based on 
pay credits (percentage of salary or compensation) and interest 
credits, rather than an annuity. 

[6] [hyperlink, http://www.gao.gov/products/GAO-08-8]. 

[7] Alicia Munnell, Francesca Golub-Sass, and Dan Muldoon, "An Update 
on 401(k) Plans: Insights from the 2007 SCF," Center for Retirement 
Research at Boston College, March 2009. 

[8] Data reported by the Social Security Administration for pension 
income includes regular payments from IRAs, Keogh, or 401(k) plans. 
Nonregular (nonannuitized or lump-sum) withdrawals from IRA, Keogh, and 
401(k) plans are not included as income. 

[9] Asset income includes income from interest, dividends (from stock 
holdings and mutual fund shares), rent, royalties, and estates and 
trusts. Sources of asset income may include IRAs and other savings. 
Capital gains from the sale of stock are not included as income. 

[10] The replacement rate generally refers to the ratio of retirement 
income to preretirement income, but specific calculations of 
replacement rates can vary. For example, the measure of preretirement 
income could be based on final pay or a longer term average of pay. 

[11] See, for example, Jonathan Skinner, "Are You Sure You're Saving 
Enough for Retirement," Journal of Economic Perspectives, vol. 21, no. 
3, Summer 2007, 59-80; Congressional Budget Office, Baby Boomers' 
Retirement Prospects: An Overview, November 2003. 

[12] Due to the long-term fiscal challenges facing Social Security, 
options for reform may result in lower benefits and reduced replacement 
rates from Social Security. As a result, reforms to the Social Security 
system may increase the need for retirement income from other sources 
such as private pensions. See GAO Social Security Reform: Answers to 
Key Questions, [hyperlink, http://www.gao.gov/products/GAO-05-193SP] 
(Washington, D.C.: May 2005.) 

[13] [hyperlink, http://www.gao.gov/products/GAO-08-8]. 

[14] Budget of the United States Government, Fiscal Year 2010, "A New 
Era of Responsibility: Renewing America's Promise" (Washington, D.C., 
Feb. 26, 2009). 

[15] Final pay DB plans calculate benefits using average earnings in 
the final years of employment, whereas career average DB plans 
calculate benefits on the average earnings in all years of employment. 

[16] Retirement income replacement rates are not directly comparable 
across countries because differences in each country's social security, 
health care, welfare and tax systems influence the level of income 
security they provide. 

[17] The NCS is an annual survey of establishments conducted by the 
U.S. Department of Labor's Bureau of Labor Statistics, which provides 
comprehensive data on the incidence and provision of selected employee 
benefit plans, such as pensions. 

[18] DB and DC plans may exclude employees who do not work at least 
1,000 hours in a year (i.e., never complete 1 year of service) but may 
not exclude part-time employees. Plans may also exclude hourly 
employees or certain salaried employees within a specific job 
classification. However, eligible employees must be allowed to 
participate in the plan as of age 21 and after completing 1 year of 
service, subject to certain exceptions. 

[19] Patrick Purcell, "Retirement Plan Participation and Contributions: 
Trends from 1998 to 2006," Congressional Research Service, January 30, 
2009, [hyperlink, http://www.crs.gov]. 

[20] A forthcoming GAO report will provide recent evidence on the 
impact of automatic enrollment. 

[21] See "How America Saves 2008: A Report on Vanguard 2007 Defined 
Contribution Plan Data," Vanguard Institutional Investor Group, 2008. 

[22] Employer-matching contributions are made only if a worker makes 
contributions to the plan, while a nonmatching contribution is made 
regardless of the worker's contributions. 

[23] Jack VanDerhei, "The Impact of the Recent Financial Crisis on 
401(k) Account Balances," Employee Benefit Research Institute, Issue 
Brief, no. 326 (Washington, D.C., February 2009). 

[24] Alicia Munnell, Francesca Golub-Sass, and Dan Muldoon, "An Update 
on 401(k) Plans: Insights from the 2007 SCF," Center for Retirement 
Research at Boston College (March 2009). 

[25] See "Building Futures VIII: A Report on Corporate Defined 
Contribution Plans," Fidelity Investments, 2007. 

[26] The pension benefit that the Pension Benefit Guaranty Corporation 
(PBGC) pays to a participant whose single-employer plan has been 
terminated depends on (1) plan provisions, (2) statutory limits on PBGC 
benefit payments, (3) the type of benefit the participant is entitled 
to receive, (4) the participant's age, and (5) amounts of assets that 
PBGC recovers from employers whose plans they have taken over. 

[27] Preretirement benefit withdrawals include loans or hardship 
withdrawals. In addition, workers can decide to take an early 
distribution subject to taxes and a 10 percent penalty when changing 
employers. 

[28] The term "portability" is also sometimes used to refer to the 
ability of plan participants to transfer accrued benefits from one plan 
to another, for example, in the case of DC plans and career average DB 
plans. 

[29] Plans may permit participants to take a general purpose loan for 
up to 50 percent of their vested account balance, or $50,000, whichever 
is less, without those amounts being considered distributions from the 
plan. 26 U.S.C. § 72(p). Participants generally must repay loans with 
interest within 5 years unless the loan is used to purchase a primary 
home and the plan permits a longer repayment period. Plans may also 
allow participants to take hardship withdrawals in amounts not 
exceeding the participant's own 401(k) contributions upon demonstrating 
an immediate and heavy financial need, which the Internal Revenue 
Service has defined as including nonreimbursed medical expenses; costs 
relating to the purchase of a principal residence; postsecondary 
tuition and related educational fees and expenses; payments necessary 
to prevent eviction from, or foreclosure on, a principal residence; 
burial or funeral expenses; or expenses for the repair of damage to a 
principal residence. 26 C.F.R. § 1.401(k)-1(d)(3) (2008). 

[30] Plans may also issue involuntary cashouts to separating workers 
whose account balances are worth no more than $5,000. If the plan 
issues a cashout and the account balance is worth more than $1,000 but 
less than $5,000, the distribution is automatically rolled over into an 
IRA unless the worker elects otherwise. 

[31] 26 U.S.C. § 72(t). 

[32] See "How America Saves 2008: A Report on Vanguard 2007 Defined 
Contribution Plan Data," Vanguard Institutional Investor Group, 2008. 

[33] Workers may also be able to take a lump-sum distribution in case 
of disability. 

[34] A forthcoming GAO report will provide more information on the 
incidence of leakage. 

[35] For more information on fees in 401(k) plans, see GAO, Private 
Pensions: 401(k) Plan Participants and Sponsors Need Better Information 
on Fees, [hyperlink, http://www.gao.gov/products/GAO-08-95T] 
(Washington, D.C.: Oct. 24, 2007) and Private Pensions: Changes Needed 
to Provide 401(k) Plan Participants and the Department of Labor Better 
Information on Fees, [hyperlink, http://www.gao.gov/products/GAO-07-21] 
(Washington, D.C.: Nov.16, 2006). A forthcoming GAO report will examine 
fees in other DC plans, such as 403(b) plans and 457 plans. 

[36] John A. Ameriks et. al., "Immediate Income Annuities and Defined 
Contribution Plans," Vanguard Center for Retirement Research, vol. 32, 
May 2008. 

[37] John A. Ameriks et. al., "Immediate Income Annuities and Defined 
Contribution Plans," Vanguard Center for Retirement Research, vol. 32, 
May 2008. 

[38] In this section, we focus exclusively on employer-based private 
pension systems; however, all three countries also have a public 
pension system, similar to the U.S. Social Security system. In all 
three countries, private pension income is considered supplementary to 
public pension income. 

[39] About 75 percent of industry-wide pension plans are mandatory and 
these industry plans cover about 67 percent of the workforce. The 
employer and worker groups making the request must represent at least 
60 percent of the workers in that industry. A company offering a more 
generous plan can be exempt from joining the industry-wide plan. 

[40] The Federal Law on Retirement, Survivors' and Disability Pension 
Plans was implemented in 1985 and specified a mandatory employer-based 
pension system. Officials said the majority of plans in Switzerland are 
hybrid plans. These hybrid plans are similar to cash balance plans, 
which in the United States are legally classified as DB plans because 
participants' benefits are determined by a benefit formula. However, a 
cash balance plan has certain features, such as hypothetical 
"individual accounts," that make it resemble a DC plan. 

[41] Officials in Switzerland told us that participation in the private 
pension system is mandatory for workers age 25 and older earning above 
20,520 Swiss Francs (about $19,000 as of June 2009). Workers earning 
below this level of income are covered by the public pension plan as 
are all Swiss workers. 

[42] The default pension fund operates similarly to most company or 
industry pension funds as a foundation independent of employers and run 
on a nonprofit basis. This fund also covers employees working for 
several employers, the self-employed, citizens living abroad, and 
people no longer covered by the mandatory private pension system but 
wishing to keep their accounts. 

[43] Officials in the United Kingdom told us that eligible workers are 
those between the ages of 22 and the retirement age, currently 65, with 
earnings over the annual minimum pay threshold of £5,035 or about 
$8,000, as of June 2009. 

[44] A qualified pension plan can be a DC or DB plan, or a combination 
of both. Qualified DC plans are those to which the employer contributes 
at the same level as required for Personal Accounts. Qualified DB plans 
are those that meet the current exemption requirements for the State 
Second Pension; overall, the DB plan must offer equivalent or better 
benefits. 

[45] Minimum total contributions change by age according to the 
following formula: 7 percent of qualified earnings from age 25 to 34; 
10 percent from age 35 to 44; 15 percent from age 45 to 54; and 18 
percent from age 55 to 65. 

[46] Officials in Switzerland said that earnings subject to mandatory 
contributions are those between 20,520 Swiss Francs and 82,080 Swiss 
Francs (about $19,000-$77,000 as of June 2009) with an offset or 
deduction tied to the public pension. 

[47] U.K. officials said that earnings subject to contributions are 
those between £5,035 and £33,540 (about $8,000 to $54,000 as of June 
2009). 

[48] Officials in the Netherlands said that earnings subject to 
contributions in the Netherlands are gross earnings minus an offset or 
deduction tied to the flat public pension. The majority of private 
pension plans in the Netherlands are career-average DB plans, although 
participants also can make contributions. 

[49] A "collective defined contribution" plan in the Netherlands is not 
a DC plan as commonly understood in the U.S. context. Rather, it is 
similar to a career-average DB plan, except employer contributions are 
fixed for a set period of time, generally 5 years, while workers' 
contributions can be adjusted based on the solvency of the plan. 

[50] Officials told us that recent changes in accounting standards 
provide an incentive for employers to offer a CDC plan. Because pension 
funds must use market values to calculate assets and liabilities, 
employers are becoming less willing to vary their contributions and 
prefer the fixed contribution schedule of CDC plans. 

[51] In the United Kingdom, officials said the minimum annual earnings 
threshold is £5,035 or about $8,000, as of June 2009. In Switzerland, 
officials said the private pension system is mandatory for workers 
earning above 20,520 Swiss Francs or about $19,000, as of June 2009. 

[52] The majority of private pension plans in the Netherlands are 
career-average DB plans, although participants also make contributions, 
unlike in most U.S. DB plans. Officials said the majority of plans in 
Switzerland are hybrid plans. These hybrid plans are similar to cash 
balance plans, which in the United States are legally classified as DB 
plans because participants' benefits are determined by a benefit 
formula. However, a cash-balance plan has certain features, such as 
hypothetical "individual accounts," and contributions made by workers, 
that make it resemble a DC plan. 

[53] In this context, to "index" benefits means to adjust benefits in 
line with price or wage growth. For example, if retirees' benefits were 
never adjusted for price increases, the purchasing power of those 
benefits would be eroded. 

[54] The funding level of a pension plan is largely determined by two 
factors--assets and liabilities. Investment returns impact assets and 
liabilities are affected by the interest rate used to compute them. 
According to officials, that interest rate is no longer fixed at 4 
percent, but changes with market conditions. Officials said that every 
month, the Central Bank publishes the interest rate that pension funds 
must use to calculate their liabilities. 

[55] Indexation policy is supervised by the Central Bank of the 
Netherlands. Specifically, if pension assets are above 130 percent of 
liabilities in a given year, accrued benefits are permitted to be fully 
indexed; if funding levels are between 130 percent and 105 percent, the 
pension fund may decide how to apply partial indexation; if the funding 
level is below 105 percent, indexation is prohibited. 

[56] This is a nominal rate of return, not an inflation-adjusted or 
"real" rate of return. 

[57] Officials told us that the right to transfer benefits is suspended 
in the Netherlands if one of the funds involved in the transfer (the 
giving or receiving fund) has a funding ratio under 100 percent. The 
Central Bank of the Netherlands, which regulates the overall recovery 
process for insolvent pension funds, re-establishes the right of 
portability once the funding status of the pension fund recovers. In 
Switzerland, officials told us that the law of vesting rights 
guarantees workers the right to pension benefits, even if assets on the 
pension fund's balance sheet do not cover the liabilities. The worker 
is entitled to the full accrued nominal retirement savings and can use 
it to buy into the new employer's plan. 

[58] Officials in Switzerland told us if the worker does not designate 
a new employer's fund within a window of time, between 6 months and 9 
years after leaving the employer, his accrued benefits are 
automatically transferred into the portability institution fund. 

[59] According to officials, pension funds can reinsure longevity risk 
by contracting with an insurance company and if pension funds are small 
enough, they must be reinsured. 

[60] Officials told us lump-sum distributions are allowed in the 
Netherlands only if the annuity payment would be less than 400 euro 
(about $550, as of June 2009) per year. According to the OECD, the 
Netherlands has introduced a flexible system of purchasing annuities 
because of the recent turmoil in financial markets, allowing one-half 
of accumulated capital to be used to purchase an immediate 5-year 
annuity, deferring the rest of the purchase after this date. 

[61] The annuity conversion rate, currently set at 7 percent, is 
multiplied by the account balance to determine the amount of the annual 
annuity income. For example, an accrued benefit of 100,000 Swiss Francs 
(about $90,000 as of June 2009) would provide an annual annuity of 
7,000 Swiss Francs (about $6,000, as of June 2009). This annuity 
conversion rate for benefits only applies to the mandatory part of the 
pension system. 

[62] Officials in Switzerland told us that the current minimum annuity 
conversion rate is scheduled to gradually decrease to 6.8 percent by 
2014. There is ongoing debate on whether to decrease it further. 

[63] Officials in the United Kingdom told us that, consistent with 
existing policy, Personal Accounts plans will permit small account 
balances below a specified threshold to be taken as a lump-sum, known 
as "trivial commutation." This threshold is set at £16,500 (about 
$27,000 as of June 2009) in the 2008-2009 tax year. 

[64] Pension funds must have a minimum funding ratio of 105 percent to 
apply indexation, according to officials. 

[65] Officials said that in the Netherlands the law specifies that the 
indexation rate applied to retirees' pension benefits be the same as 
the one applied to the accrued benefits of workers who have left the 
employer but whose benefits are still part of the fund. 

[66] In some cases multiple proposals may exist for similar designs. 
For example, proposals for a Universal 401(k) type plan also were 
developed by the Center for American Progress in A Progressive 
Framework for Social Security Reform and as part of the Conversation on 
Coverage (Retirement Investment Account). When this occurred, we 
selected the proposal that best fits the criteria we outline in 
appendix I. In addition, proposals for a DB(k) plan were not included 
in our analysis because their basic design principles were incorporated 
into the Pension Protection Act of 2006's "eligible combined plan." 
Pub. L. No. 109-280, § 903, 120 Stat. 780, 1040-48 (codified at 26 
U.S.C. § 414(x) and 29 U.S.C. § 1060(e)). 

[67] Pamela Perun and C. Eugene Steuerle. "Why Not a "Super Simple" 
Saving Plan for the United States?" Washington, D.C., The Urban 
Institute, 2008. 

[68] All current standard 403(b) plans and SIMPLE and Safe Harbor plans 
could be converted to Super Simple plans. Existing 401(k) plans would 
be grandfathered in, but would also have the option of converting to 
Super Simple plans. 

[69] Nondiscrimination requirements provide that private employers who 
sponsor tax-qualified pension plans must meet certain requirements 
regarding how benefits or contributions are distributed between rank- 
and-file employees and highly compensated employees, such as company 
executives and owners. The Saver's Credit is a tax benefit for low-and 
moderate-income individuals that make voluntary contributions to 
employer-sponsored retirement plans or individual retirement 
arrangements. In 2009, married couples filing jointly with incomes 
below $55,500, taxpayers filing as head of household with incomes below 
$41,625, and single taxpayers (including married individuals who file 
separately) with incomes below $27,750 qualify for the credit. It is 
provided in addition to other tax benefits which may result from the 
retirement contributions. For example, most workers at these income 
levels may deduct all or part of their contributions to a traditional 
IRA. 

[70] The ERISA Industry Committee. "A New Benefit Platform for Life 
Security" Washington, D.C., The ERISA Industry Committee, 2007. The New 
Benefit Platform also includes a tax-preferred short-term savings 
account and health care benefits in its system. 

[71] Under current law, plan sponsors are generally plan fiduciaries. 
29 U.S.C. § 1002(21). With limited exception, they retain liability for 
ensuring that plans are administered solely in the interest of 
participants and, for example, to provide plan benefits and defray 
reasonable expenses for administration, even if they utilize the 
services of third parties to assist with plan administration. 29 U.S.C. 
§ 1104. 

[72] Michael Calabrese, "A Universal 401(k) Plan," Washington, D.C., 
The New America Foundation, 2007. See also, Michael Calabrese, 
"Universal 401(k): A Retirement Saving Plan for Every Worker," 
Testimony before the Subcommittee on Health, Employment, Labor & 
Pensions, Committee on Education and Labor, U.S. House of 
Representatives, Washington, D.C., 2007. 

[73] Unlike the United Kingdom's plan, which transfers the plan 
management and administration to a nongovernmental trustee corporation, 
the U.S. government retains responsibility for running the Universal 
401(k) plan. 

[74] Teresa Ghilarducci, "Guaranteed Retirement Accounts: Toward 
Retirement Income Security" Washington, D.C., Economic Policy 
Institute, 2007. 

[75] The original Guaranteed Retirement Accounts proposal calls for an 
elimination of tax preferences for DC plans, such as 401(k) plans. The 
author has since updated this provision of the proposal and would now 
allow tax preferences for contributions to DC plans up to $5,000, 
adjusted for inflation. 

[76] Annuities are the standard benefit payment option for DB plans, 
although some DB plans also allow lump-sum payments. 

[77] W.G. Gale, J.M. Iwry, D.C. John, and L. Walker. "Increasing 
Annuitization in 401(k) Plans with Automatic Trial Income." Washington, 
D.C., The Retirement Security Project, 2008. 

[78] The Aspen Institute. "Savings for Life: A Pathway to Financial 
Security for All Americans." New York, NY, The Aspen Institute, 2007. 

[79] A mandatory retirement system cannot ensure 100 percent coverage 
if certain groups, such as very low-income workers, are exempt from the 
mandate. 

[80] Because all DC plans and some DB plans will not meet the GRA 
proposal's mandatory eligibility requirements, the proposal could 
potentially replace a significant part of the existing private pension 
system. A DB plan meets the criteria if the plan sponsor contributes at 
least 5 percent of payroll to it per year and pays out retirement 
income as an annuity. A 5-year average contribution rate would be used 
to determine whether plans met the exemption criteria. DB plan sponsors 
who make sporadic and uneven contributions would not qualify, but 
hybrid plans like cash-balance plans would qualify as long as 
contributions to it are at least 5 percent of payroll, and retirement 
income is paid out as an annuity. 

[81] See GAO 401(k) Pension Plans: Loan Provisions Enhance 
Participation But May Affect Income Security for Some, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-98-5] (Washington, D.C.: Oct. 1, 
1997). 

[82] We used the 1990 birth cohort for our simulations so that policy 
options, if implemented in the near future, would be in effect for the 
majority of this cohort's working life. 

[83] Our projections assume stocks return an annual non-stochastic real 
rate of return of 2.9 percent, equivalent to the government bond rate. 
In an alternate simulation, we assume stocks earn an annual non- 
stochastic real rate of return of 4.9 percent and find similar effects 
for each policy option (see appendix I, table 13). Using different 
rates of return reflects assumptions used by the Social Security 
Administration's Office of the Chief Actuary (OCACT) in some of its 
analyses of trust fund investment. 

[84] Our modeling assumptions do not alter current standards for 
eligibility. Thus, under universal access with mandatory participation 
some workers, such as part-time workers who work less than 1,000 hours 
a year, may not be eligible for pension coverage according to plan 
provisions. 

[85] See, for example, GAO, Private Pensions: Low Defined Contribution 
Plan Savings May Pose Challenges to Retirement Security, Especially for 
Many Low-Income Workers, [hyperlink, 
http://www.gao.gov/products/GAO-08-8] (Washington, D.C.: Nov. 29, 2007) 
and Private Pensions: Information on Cash Balance Pension Plans, GAO-
06- 42 (Washington, D.C.: Nov. 3, 2005). 

[86] For more information on PSG microsimulation models, see 
[hyperlink, http://www.polsim.com]. For more details on PENSIM, see 
Martin Holmer, Asa Janney, and Bob Cohen, PENSIM Overview, available 
from [hyperlink, http://www.polsim.com/overview.pdf]. 

[87] While these models use sample data, our report, like others using 
these models, does not address the issue of sampling errors. The 
results of the analysis reflect outcomes for individuals in the 
simulated populations and do not attempt to estimate outcomes for an 
actual population. 

[88] The difference between the return on equities and Treasury bonds 
represents the compensation that individuals require for the higher 
risk of holding equities. Since our projections do not stochastically 
model stock returns, assuming a rate of return on assets equal to the 
historical return on stocks does not capture the risks associated with 
stock returns; we therefore also model DC savings under a scenario in 
which all assets return the government bond rate of return. Using the 
government bond rate of return, we find similar results for the 
relative impact of each policy option. For more discussion of the 
appropriate rate to use in projections, see "Analysis of H.R. 3304, 
Growing Real Ownership for Workers Act of 2005," Congressional Budget 
Office, September 13, 2005, 63-65. 

[89] Annuity equivalents are calculated by converting DC-derived 
account balances at retirement into inflation-indexed retirement 
annuity payments using annuity prices that are based on projected 
mortality rates for the 1990 birth cohort and annuity price loading 
factors that ensure that the cost of providing these annuities equals 
the revenue generated by selling them at those prices. 

[90] We classify as retired those workers who become disabled after age 
62. We do not classify as disabled those workers who recover from a 
disability prior to age 62. 

[91] We drop cohort members who die before retiring because we assume 
annuitization at retirement, but someone who dies before retiring would 
never annuitize his DC savings. We apply the other conditions because 
such cohort members are likely to have fewer years in the workforce to 
accumulate DC plan savings. 

[End of section] 

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