Under Ghilarducci’s plan, private-sector workers or employers could voluntarily open an account in a state-level public retirement fund such as the California Public Employees’ Retirement System or CalPERS. Workers and/or employers would contribute at least 5% of pay into an account guaranteed to earn at least 3% above inflation. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life.
“The recession’s effects on state budgets has diverted the discussion about pension reform to the promises made to public sector retirees,” said Ghilarducci, according to a press release. “While state officials debate how to reform public pensions, all workers deserve access to safe, effective retirement plans. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.”
The proposal takes advantage of existing state pension infrastructure to invest private-sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. In fact, public pension plans outperformed 401(k) plans or IRA accounts by 20 to 40% over the last 30 years. These funds are able to use their bargaining power to lower fees, and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from swings in asset prices.
All states could offer a similar structure overseen by an independent board of trustees and administered like the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail market.
Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job. Though these funds would be kept in a separate investment pool from public sector funds, having private sector workers invested in the same system would shore up public support for state public pension funds.
Ghilarducci previously advocated for a "Guaranteed Retirement Account" (funded by a 5%-of-pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans (see "IMHO: The Pit and the Pendulum"). Also, she suggested allowing workers to "trade their 401(k) and 401(k)-type plan assets" for one of those Guaranteed Accounts.
Read more about Ghilarducci’s thoughts on retirement plans here.
In a video, Ghilarducci, Employee Benefit Research Institute (EBRI) CEO Dallas Salisbury, and Alex Brill from the National Commission on Fiscal Responsibility and Reform discuss 401(k)s and possible replacements (see "Should We “Ditch” 401(k) Plans?").