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Retirement Plans Get Extreme Makeover

Dozens of proposals for a new retirement standard are in the hands of advocates.

BOSTON (TheStreet) -- How would you fix America's retirement system?

Retirement USA

a year ago asked that question in advance of a conference on "'Re-Envisioning Retirement Security" in seeking proposals for an alternate retirement system to replace what its membership says is a failed system of 401(k)s.

A year later, in addition to what was used for that conference, 25 alternative retirement system plans have been submitted, revisited and revised. Two other proposals will be formally added to the roster in the coming days and other groups are also drafting their own re-imagining of retirement security, says Karen Ferguson, director of the

Pension Rights Center

(PRC), a non-profit consumer advocacy group.

PRC is a member of Retirement USA along with the AFL-CIO, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare and the Service Employees International Union.

Also developing proposals is the

Society of Actuaries

through its Retirement 20/20 initiative, which brings together companies and organizations with an interest in developing new retirement systems. At a June conference, six plan concepts were



This month, Retirement USA stepped up its advocacy efforts, particularly through "Wake Up Washington," a campaign intended to share personal stories of savings struggles with elected officials.

"The common theme in all of this is that there is widespread anxiety among individuals," Ferguson says. "They are terrified. They all think it is their fault they don't have enough money and don't realize it is a structural problem. If they lived in most other industrialized countries, they wouldn't have this anxiety."

Among the proposals being considered by Retirement USA, the most controversial, at least given the ire it has inspired among conservative pundits, is the Guaranteed Retirement Account Plan developed by professor Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the

New School for Social Research


The proposal is often derided by conservatives and Tea Party supporters as an effort by the government to "seize your 401(k)."

The very mention of Ghilarducci and her plan at a recent congressional hearing on retirement security was enough to rekindle the opposition and conspiracy theories. Conservative bloggers heaped scorn, once again, on the proposal as a "Ponzi scheme," a means to line politicians' pockets and perpetuate out-of-control spending and yet another "pitchfork moment."

The GRA proposal mandates a contribution of 5% of earnings (up to the Social Security wage base) for all workers -- evenly divided between employer and employee. The employee's share of the contribution would be offset by a $600 refundable tax credit, which would cover the contribution obligation of an employee with income up to $24,000. The contributions of husbands and wives would be combined and divided equally between their individual accounts.

The plan would provide for a guaranteed 3% annual rate of return adjusted for inflation. If actual investment returns would be consistently higher than 3% inflation-adjusted over a number of years, the trustees of the plan could distribute a surplus to GRA participants. A balancing fund would be maintained to ride out periods of low investment returns. Account balances would be converted to inflation-adjusted annuities upon retirement, with a partial (10%) lump sum available.

Next month, the

Economic Policy Institute

plans to release details of what it is calling GRA 2.0, a modified version of the original plan.

"It could be incrementally modified," says EBRI economist Monique Morrissey. "One of the issues is that it was conceived originally as a big centralized plan, but the general model could be applied to a more decentralized system. It could be scalable. Another area we are going to be looking at is how the federal government can provide rate of return guarantees without necessarily doing the entire GRA plan as it is."

Political feasibility is among the concerns, and Morrissey says there may be advantages to rethinking the idea in terms of a decentralized system and "having fewer issues related to government control over funds invested in the public sector."

"GRA 2.0 isn't going to be so much a brand-new plan, as it will be variations on a theme," she says. "Something that looks more like a cash balance or hybrid plan is really the way of the future. There are a lot of organizations and a lot of different people who have come to that conclusion. We do need to address both risk and that individual employers are not necessarily in a position to provide traditional pensions. We need a system that fixes both problems."

Morrissey is unfazed by the furor the original plan sparked and looks back on the irony of the fact that when the GRA plan was first introduced, they were proud of the fact that it was fiscally conservative and that it worked within a balanced budget.

Ferguson says the "keep government's hands off my 401(k)" set fails to see the problem with the logic.

"401(k)s are a government program," she says. "They are paid for through enormous tax incentives. They are a government-facilitated program. Tax payers pay more taxes, or get less in government services, to pay for the tax breaks for those who can afford to contribute to 401(k)s and, therefore, get good matches from the employers who provide them."

As a coalition, Retirement USA has not formally endorsed any of the proposals it has received and publicized, but Ferguson says it could do so in the future if enough of a consensus is reached among members.

A requirement for any proposal the coalition considers is that it ensures steady retirement income for life and that investment and longevity risks be spread, not just shifted from employers to workers, she says.

The proposals received by Retirement USA can be found

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A sampling of the concepts:

The Guaranteed Benefit Plan

This plan would have competitive, independent benefit administrators administering health and retirement plans, creating the GPB, a hybrid arrangement, similar to a cash balance plan that would, at a minimum, guarantee principal against a net loss.

Distributions from the GBP would be paid out at retirement only as a stream of payments or in annuity form. Because each benefit administrator is expected to enroll very large numbers of employees, this large pool would help bring down the cost of annuities, making them significantly more affordable to retirees. It would be guaranteed by the Pension Benefit Guaranty Corp.

Bring Executives Back Into Qualified Pension Plans

Proposed legislative changes would induce or force senior corporate officers and executives to rely on qualified plans for retirement security along with the rest of the workforce. The idea is that by forcing executives to rely on these plans, they are, in turn, prompted to develop better plans for all workers. The proposal would prohibit all non-qualified deferred compensation.

Retirement-USA Plus Plan

This would establish a defined benefit plan sponsored and administered by the government. Benefits would equal 20% of currently scheduled Social Security benefits and be paid automatically in the form of annuities. Group life and disability insurance would also be provided.

Financing mechanisms would include revenue from a dedicated federal estate tax and investment income on plan reserves.

Universal Voluntary Accounts

UVAs would be state sponsored and administered, with the investment privately managed. Under this plan, every worker in a state would have access to a defined contribution plan through his or her job. The proposal would keep costs low by offering a small number of investment options similar to the current Thrift Savings Plan, and limiting opportunities for participants to switch investment allocations between the options.

10%-of-Earnings Universal Pension System

The proposal would implement individual accounts for all private and public workers and mandate that workers contribute 10% of their salary (up to the Social Security wage base). Contributions to the accounts would be pre-tax, assets would grow tax-free and the accounts would be annuitized at retirement with no allowable pre-retirement distributions.

Growth IRAs

This would provide a supplement to Social Security in the form of an IRA provided to every U.S. newborn and funded by estate tax revenue, giving each participant at birth an initial contribution of about $5,000. The Social Security Administration would administer the IRAs, and upon retirement the account balances would be annuitized and paid out to participants on a periodic basis.

--Written by Joe Mont in Boston.

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