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.”