The following proposal was presented by Gene Kalwarski at the Re-Envisioning Retirement Security Conference [1] on October 21, 2009.
Variable Defined Benefit Plan
This proposal creates a new type of defined benefit plan, which might be described as a floor-elevator plan. Each participant would receive an annual floor benefit, which would be stated in the form of a uniform retirement annuity. (The benefit could be either a flat benefit or a percentage of pay, in which case the floor benefit would look like a career average defined benefit.) The floor benefit would be actuarially determined from the plan’s contribution base for all participants in the plan as a uniform benefit, but using a conservative interest assumption.
The floor benefit would also be converted into investment units in the plan’s collective assets, which would be professionally managed. (A $100 floor benefit would purchase $100 of investment units.) These investment units would fluctuate in value annually, increasing in value if the plan’s investment return exceeded the conservative interest assumption (plus a reserve factor) and decline in value if the plan’s investment return falls below the assumption. At retirement, the employee would receive the greater of the sum of their floor benefits or the sum of their investment units. Benefits would be paid only in annuity form, although a plan could be structured to provide for death, disability, post-retirement inflation protection, and/or early retirement.
The VDBP was conceived as a collectively bargained plan, but could be made the backbone of a universal retirement system by creating a series of such plans for different groups of participants. Such plans might be structured around industries, might be regional, or might be offered to employers for their employees by governmentally chartered entities. The plans would be jointly managed by employee and employer representatives. The plan could be funded by employer, employee, with public subsidies for lower and moderate income workers.