With an estimated $5 trillion in unfunded city and state pension liabilities, something has to be done. Are 401ks the answer, or will the solution be more “creative?”
Recognizing a shift away from pension plans will happen—sooner rather than later—the Golub Center for Finance and Policy (GCFP) at the Massachusetts Institute of Technology (MIT) has put out a call for strategic proposals “aimed at enhancing retirement plans covering millions of public sector workers across the US.”
MIT is offering up $20,000 to whoever comes up with “the most well-reasoned, prudent and implementable strategies,” the Center said in a statement.
So, what’s its beef with 401ks?
Apparently MIT is specifically seeking “a third type of retirement plan, which manages risk better than a DC plan while operating at the lower costs of a DB plan” in order to appease public sector unions that “have resisted the move to DC plans for a variety of reasons, including concerns about plan underfunding associated with shifting investment responsibility from employer to employees.”
One such potential solution, according to the Center, is a collective defined contribution plan (CDCP).
CDCP assets, which consist of both employer and employee contributions, are invested and managed in a collective pool. Like 401ks, benefits are still dependent on investment performance; however, multiple generations of retirees share the risk.
“The goal of the contest is to find the highest level of scheduled benefits that a well-structured CDCP is likely to deliver to retirees,” Deborah Lucas, MIT Sloan professor and GCFP academic director, said in a statement. “We’re looking for input on an investment strategy and risk-sharing policy that could be followed by CDCP managers to provide retirees with the highest achievable scheduled benefits subject to the limits on the probability and severity of benefit shortfalls.”
Jessica Claeys is an editor, writer, and graphic designer, who has been creating both print and digital marketing and communications content for 10+ years.
Jessa Claeys is a licensed insurance producer in the state of Colorado and an insurance editor for Bankrate. She currently covers auto, home and life insurance with the goal of helping others secure a healthy financial future. Jessa has over a decade of experience writing, editing and leading teams of content creators. Her work has been published by several insurance, personal finance and investment-focused publications, including BiggerPockets, 401(k) Specialist, BP Wealth and more.