Secure Choice Pension
(SCP) Plan FAQS

What is the Secure Choice Pension proposal?
What's the point of a new pension plan? They've practically disappeared from the private sector – and public sector plans are just draining precious revenues from strained state coffers.
So if pensions are such a good idea, why don't private businesses offer them anymore? Why should the State get involved?
Why do we need this? Isn't this just a solution in search of a problem?
What are the benefits?
How can you say that the public sector has a workable model when they are all going broke?
So how can a public pension model help all Americans achieve a secure retirement?
How would this work?
What about ERISA? In the current political and economic environment, isn't passage of federal enabling legislation a pipe dream?
What rate of return is assumed in the plan? Is this set by state law?
Are SCPs for businesses and individuals who already have a pension plan as part of their benefits package?
Would this plan be a replacement for existing plans?
Do both employers and employees contribute?
If an employer chooses to participate, will all his/her employees automatically be enrolled in the plan?
Why would an employer want to participate in this plan, rather than a 401(k)?
You stated that the retirement benefit follows workers. How does that work?
What does an SCP mean for a union or public–sector pension plan participant?
What happens if there's a market downturn? How can this plan guarantee a benefit?
What happens if a private employer goes bankrupt and can no longer make contributions? Who is left holding the bag? Aren't states that would choose to participate just taking on another liability?
What if the board overpromises in good economic times and then finds the plan in a shortfall situation in a market downturn? Are there protections against that?

 


What is the Secure Choice Pension proposal?

The SCP is envisioned as a partnership between the private sector and the state to create a simple, affordable employer– and employee–friendly pension plan providing lifetime retirement income for participating private sector employees. State–enabling legislation would establish an independent board that would develop a simple pension plan that private sector businesses and non–profits could join as participating employers. The board would outsource plan investment and could take advantage of existing state retirement infrastructure by investing the SCP's assets along side the investments of the state's retirement system. The SCP would provide a modest benefit based on a conservative funding method. The SCP would be funded entirely by participating employer and employee contributions and investment returns on those contributions. The State would have no liability for any SCP underfunding.

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What's the point of a new pension plan? They've practically disappeared from the private sector – and public sector plans are just draining precious revenues from strained state coffers.

  • Pension plans have traditionally been a crucial part of the three–legged retirement stool – Social Security, personal savings including 401(k)s and a pension. In the current economy and a toxic partisan political climate, with states experiencing revenue and budget shortfalls, the minority of Americans who still have a pension are coming under political attack. Attacking other middle class working people is not the answer. Instead, we have to create an affordable, sustainable pension system we can all participate in, allowing us all to retire with financial security.
  • Retirement security is a problem for all Americans. Pension plans are the most effective and efficient means of ensuring an economically viable retirement. Numerous surveys show that the vast majority of American workers would prefer a pension in addition to personal savings and Social Security to guarantee financial security in retirement.
  • Public–sector plans in particular have a century–long record of strong performance that can and should serve as a model for viable, reliable retirement plans.
  • For the past 20 years public pension plans in the United States averaged an 8.2 percent rate of return per year. In FY 2011 ending June 30, many public pension plans reported annual rates of return of over 20 percent.
  • State budget shortfalls are due to decreases in revenue. The average state contribution to a public pension fund is only 3 percent of the state budget and represents only about a quarter of the typical public pension plan's funding. The rest comes from employee contributions and investment returns.
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So if pensions are such a good idea, why don't private businesses offer them anymore? Why should the State get involved?

  • Since the 1980s, more and more private businesses that once offered traditional defined–benefit pensions have switched to 401(k)s and other defined contribution plans in an effort to cut costs.
  • Many small businesses – which employ the majority of private–sector workers – cannot afford to establish pensions or adopt currently available 401(k)–style retirement savings plans.
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Why do we need this? Isn't this just a solution in search of a problem?

  • There is currently a staggering $8 trillion–plus deficit in private sector retirement savings. Many baby boomers – who will swell the over–65 population to record proportions – are and will be retiring with insufficient assets.
  • The federal government funds many programs for those in financial need. When our economy crashes, more and more people need assistance. By offering a defined benefit pension that has zero cost for taxpayers, the state–sponsored SCP will help retirees maintain their financial independence and be less dependent on government assistance programs.
  • And answer these questions: How will individuals retire without adequate resources? Will they have to rely on government safety net programs? How will those programs be paid for? How will younger workers move into the workforce, and rise to better positions in the workforce, if older workers cannot leave?
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What are the benefits?

  • Society/Economy: Millions of private–sector workers who currently have no access to at–work pension plans would be able to retire with a monthly lifetime income – allowing them to remain financially independent. Instead of relying on government assistance programs, they will be able to participate in the economy. Studies show that for every pension dollar paid out. $2.35 in economic activity is generated. Rather than being a drag on the economy and government resources, retirees with SCP benefits will contribute to economic stability and growth.
  • Businesses: Small to mid–size businesses can now compete with larger companies in recruiting and retaining qualified employees through an attractive retirement option that they currently cannot afford to offer. For large businesses, participation reduces their retirement plan administration costs.
  • Taxpayers: SCPs will not cost taxpayers any state money because they will be funded entirely by employer and employee contributions. In fact, taxpayers will benefit because an expanded and strong middle class with financial security in retirement will decrease the strain of public assistance programs on state budgets.
  • Participants: Individuals will have a new secure choice for retirement that offers them a guaranteed monthly income stream when they retire and an attractive option beyond 401(k)s and other self–directed plans.
  • States: A state with an SCP would have a competitive advantage when trying to attract out–of–state businesses. Furthermore, a state with a strong pension system for its citizens upon retirement will benefit from their increased economic activity. Studies show that for every pension dollar paid out, $2.36 in economic activity is generated. Most individuals, nearly 90 percent, retire in the communities they worked in. Without an adequate retirement income, a state's retiree population cannot continue to be active consumers and taxpayers and will be increasingly at risk of relying on the publicly funded safety net.
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How can you say that the public sector has a workable model when they are all going broke?

  • Not so; the vast majority of state plans, even after the market crash in 2008, are funded at 70 percent or higher. The Public Fund Survey released in September 2011 found the average funding level of 77.2 percent. Fitch Ratings considers a 70 percent funding level adequate for a pension fund to remain viable.
  • Since the 2008 downturn, public pension plans have shown tremendous resilience by adjusting their benefit designs to sustain future pension payments. In 2011, 39 states made significant modifications to their pensions.
  • These changes apply to both existing and newly hired workers. This demonstrates how nimble these plans can be in adjusting to changing economic environments. Although 2008 saw an extraordinary market downturn, public plans – the oldest of which was founded in the last century – have navigated multiple decades of market fluctuations.
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So how can a public pension model help all Americans achieve a secure retirement?

The proposed Secure Choice Pension (SCP) plan allows private companies and individuals to participate in a state–sponsored pension plan for the private sector. This model extends to all Americans the benefits of a proven, cost–effective retirement system that will provide guaranteed income for life in retirement.

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How would this work?

Each state would establish an SCP for in–state private–sector businesses and their employees. Both businesses and their employees would have the option of participating in the state–sponsored SCP. Both participating employers and employees would make contributions to the plan, which would be managed by investment professionals.

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What about ERISA? In the current political and economic environment, isn't passage of federal enabling legislation a pipe dream?

SCP is the “perfect world” program where federal legislation amending ERISA and the Tax Code would (a) allow employee contributions to be tax–deferred (like 401k or state pick–up); (b) clarify that the plan was a single employer rather than a multiple employer; and (c) insulate employers from ERISA fiduciary liability for management of SCP or the Fund.

As an alternative to a plan requiring the amending of ERISA we are also proposing what we call SCP–Lite – a plan that assumes no federal law changes. Thus, under Secure Choice Lite: (a) employee contribution would be post–tax (but pension payments would be partially tax–free); and (b) participation would be limited to employers with 100 or fewer employees (to take advantage of simplified annual reporting requirements).

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What rate of return is assumed in the plan? Is this set by state law?

Seven percent would be used to determine an SCP's funding status. Five percent would be used to determine a participant's account balance and pension benefit. Three percent would be the guaranteed minimum return on a participant's account balance and pension benefit. No, it is not set by state law, but is based on actuarial estimates of long–term returns.

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Are SCPs for businesses and individuals who already have a pension plan as part of their benefits package?

No. SCPs are specifically designed for businesses and individuals who currently have either no retirement benefits or have only 401(k)s.

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Would this plan be a replacement for existing plans?

No. The SCP is designed as an option. It can either be a stand–alone plan where none exists or an adjunct to an existing 401(K) to add more financial certainty in retirement.

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Do both employers and employees contribute?

Yes. The SCP design is based on a 6 percent annual contribution based on salary. Under existing federal tax law only employer contributions can be made on a tax–deferred basis. Both employer and employee contributions are desired – employer contributions are part of the design. However, changes in federal and state law to permit pretax contributions would encourage a shared contribution between employers and employees.

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If an employer chooses to participate, will all his/her employees automatically be enrolled in the plan?

This will be a choice at adoption by the employer and/or state.

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Why would an employer want to participate in this plan, rather than a 401(k)?

  • We don't view this as an “either–or” proposition. The traditional three–legged stool of retirement security – (1) Social Security; (2) personal savings, including 401(k)s; and (3) pension – needs shoring up in all areas. The SCP is a pension plan. It is a necessary element of retirement security.
  • It provides a competitive advantage when competing for and retaining talent.
  • For an employer who currently offers no retirement benefit, it is a way to provide a pension without taking on the costly administrative and investment functions.
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You stated that the retirement benefit follows workers. How does that work?

Should a worker move from one employer to another who participates in the plan, the new employer would continue to make contributions to the worker's account. Workers who change employment but whose new employer is not participating in the plan can keep the account and it will continue to grow.

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What does an SCP mean for a union or public–sector pension plan participant?

SCPs are only for businesses and individuals who currently have either no retirement benefits or only have a 401(k). However, an expanded, strong, state–sponsored pension system reinforces the importance of union and public–sector pensions in the eyes of the general public and state officials.

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What happens if there's a market downturn? How can this plan guarantee a benefit?

  • The design would create a reserve fund that captures and holds any earnings over 5 percent.
  • The investment portfolio would be managed professionally. Similarly managed public–sector funds for the 25 years ending in 2008 earned on average 9.25 percent. The US Census just reported that public pension plan assets hit a three–year high of $2.8 trillion, with returns up 17.6 percent over June 2010.
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What happens if a private employer goes bankrupt and can no longer make contributions? Who is left holding the bag? Aren't states that would choose to participate just taking on another liability?

  • The design would freeze the benefits for the workers in the plan associated with that employer. The state would decide how to finance any shortfall, which could be done through setting up an insurance or reinsurance program to finance the withdrawal liability or paying any deficit from the reserve fund. The very last option would be to determine those workers' benefit based on existing contributions, which could result in a lower benefit.
  • State governments will be in complete control of their own destiny on this matter. First, they will each choose whether to even pursue the creation of an SCP. Next, they will each design a financial backstop, which could come in a variety of forms based upon their unique circumstances. States are laboratories of public policy. From a macro perspective, a successful state SCP will decrease the burden on state and local governments by reducing the need for retirees to rely on public assistance.
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What if the board overpromises in good economic times and then finds the plan in a shortfall situation in a market downturn? Are there protections against that?

  • Yes. When returns are better than expected, the lion's share must be reserved for a “rainy day” or reserve fund.
  • Only a limited portion is available for supplemental benefits and then only when investment returns consistently perform above the assumed rate of return.
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