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There are two very different types of proposals for private pension system change that have been put before Congress. The first type of change can be seen in the Pension Preservation and Savings Expansion Act (PPSEA), introduced in 2003 by Portman and Cardin. PPSEA is a ‘traditional’ type of pension reform, an omnibus bill that tinkers with almost every aspect of the private pension system to make incremental changes. The second type of proposal can be seen in the attempt of the Administration to effect radical change and simplification in the structure of the private pension system. The 2003 proposal, modified in budget submissions in 2004, contemplated a sweeping consolidation in the number and types of defined contribution (DC) plans. This chapter evaluates these two approaches to change; the first one for incremental change, and the second one involving greater structural reform; and then it considers an alternative.

This chapter examines the holding patterns of company stock in defined contribution (DC) plans, why employers and employees tolerate high levels of company stock holdings, and the impact of concentrated holdings on retirement incomes. It is argued that retirement systems with concentrated stock positions will always have some participants lose their DC plan savings to firm bankruptcy. Company stock in retirement portfolios leads to greater extremes in accumulated wealth due to its higher volatility, and a lower median wealth compared to a system of diverse investments.

The chapter examines how workers’ attitudes about money and retirement planning influence their participation in defined contribution (DC) pension plans. Workers were grouped into five “money attitude” clusters. Individuals showed difference preferences for the types of planning activities needed to be successful in conventional DC plans.

The dramatic political and economic changes witnessed by Central and Eastern Europe (CEE) and the Former Soviet Union (FSU) since the late 1980s did not leave the area of old-age security unaffected. While the inherited pension systems were rather uniform, the past seventeen years have brought diversity to the region's retirement schemes. Most transition countries have opted for parametric reforms, thus changing key characteristics of their pre-existing pay-as-you-go schemes. A number of countries in the region have embarked on partial or full pension privatization, thereby following the much advertised Latin American role models. Moreover, some countries have introduced national defined-contribution plans, similar to the schemes of Sweden and Italy. Overall, contributory approaches to old-age security — whether publicly or privately organized — dominate the post-socialist pension reform agenda. This chapter outlines the pre-1989 legacy in old-age security and the impact of transformation on the existing retirement schemes. It reviews pension reforms in CEE and the FSU and evaluates the state of pension reform in the post-socialist world.

Today it is natural to associate mutual funds with retirement plans since funds are the largest funding medium for 401(k) and other defined contribution plans, as well as for Individual Retirement Accounts (IRAs). But for many years the retirement market was dominated by defined benefit plans, which did not invest in mutual funds. The revolution in retirement plans began in 1962 when Congress authorized self-employed individuals to establish “Keogh plans.” It accelerated with the enactment of the Employee Retirement Income Security Act of 1974, which created the first IRAs, and took a quantum leap forward in 1978 when Congress authorized the creation of 401(k) plans.

This chapter examines the rate of return guarantee options in defined contribution (DC) plans. Guarantees in DC plans offer fixed nominal rates of return over a calendar year. Rate of return guarantees have few behavioural effects on workers, since participants do not determine investments in their pension accounts. The guarantee could affect the extent to which workers assume risk in their nonpension investments, since it makes their investments in their DC plan relatively low risk.

This chapter brings together the literature on pension compensation and optimal portfolio choice to seek solutions to the ‘pension design’ problem. It identifies the factors that must be taken into account when designing pension schemes. It then discusses life cycle models of employee preferences, presents a specific model of this type, and presents some results. It is shown that defined benefit (DB) pension arrangements magnify the risk exposure of an individual to salary risk, and both defined contribution (DC) and DB pension arrangement defer the pay of younger workers to later in their lives. In contrast, DB pensions may be a cost-effective method of compensation for older, less well-educated employees. Promising workers a stake in an underfunded pension plan is an expensive way to pay employees, particularly if the underfunding has no positive impact on effort. Giving workers 401(k) plans holding restricted company stock is also an expensive way to remunerate employees, because they are already heavily exposed to company risk.

This chapter proposes a measure of the diversification level in defined contribution (DC) plans, and explains how plan participants can insure themselves against a decline in wealth due to an undiversified position with the DC plan. The measure shows the investor how efficiently his 401(k) portfolio is chosen. The insurance takes the form of an option contract that gives the recipient the higher of the return to company stock or diversified portfolio over a given future term.

This chapter presents an overview of the two major types of pension plans: defined benefit (DB) plans and defined contribution (DC) plans. Under DB plans, the employee receives an annuity at retirement and in which the payment level depends on a formula specified by the plan. DC plans are individual account plans in which a person’s retirement benefit depends on contributions and on investment returns. The discussion of DB plans will focus on how benefits accrue over an employee’s career. The discussion of DC plans will differentiate among the several varieties of this plan type.

This chapter discusses developments in managing risks in retirement plans. It begins with a brief analysis on why traditional defined benefit pension plans are being abandoned for defined contribution plans. It identifies key risks affecting both types of plans, and how these can be managed. An overview of the studies included in this volume is then presented.

This chapter begins by discussing the trend towards defined contribution (DC) plans over the last 25 to 30 years. This trend has placed more and more sponsors in a situation where the employees are responsible for choosing the asset allocation that will determine their retirement pension income. Employer responsibilities in this setting are discussed. The second section discusses investment policy for DC plans, which includes the choice of investment alternatives and the approach to employee financial education. The third section discusses asset allocation for DC plans. It includes an analytical framework that demonstrates the effect of the asset allocation decision on expected risk and return.

This chapter examines the extent to which individuals can and do insure themselves against longevity risk in defined contribution plans, and why this is an issue of policy concern, focusing on three main issues. First, the welfare gains from annuitization that result from a standard life cycle model are reviewed. Second, several reasons are enumerated as to why households choose not to annuitize despite the theoretical welfare gains, including the presence of Social Security, the pricing of annuities in the market, bequest motives, inflation risk, health uncertainty, ignorance, and regulatory impediments. Third, it is demonstrated that one result of the shift from defined benefit to defined contribution plans is a reduction in opportunities to annuitize retirement wealth, since the majority of defined contribution plans do not offer an annuity payout option.

Employee stock ownership plans (ESOPs) are a special form of defined contribution (DC) plan available to corporate sponsors in which the investments are not employee directed. There are essentially two types of ESOPs: ESOPs that borrow money to buy stock in the sponsoring employer, and ESOPs that do not borrow money. This chapter begins by describing ESOPs, then discusses the advantages and disadvantages of using company stock in a DC plan. It shows that the costs associated with using company stock are greater than many people realize — for plan participants and shareholders.

This chapter examines the implications of the shift from defined benefit plans to defined contribution plans. In 1975, almost 68 percent of the benefits that were paid out of private employer-sponsored pension plans came from defined benefit plans. Over the next thirty-five years, the roles of defined benefit and defined contribution plans were reversed. When the Employee Retirement Income Security Act (ERISA) was implemented in the mid-1970s, the operations of defined contribution plans were remarkably different from those today. Since ERISA took effect, some defined contribution plan sponsors had been allowing workers to direct the investment of their retirement assets. The chapter also looks at the rise of 401(k) plans—also known as do-it-yourself pensions—and the retirement security concerns they raised. Finally, it considers the Pension Protection Act of 2006 that institutionalized automatic enrollment and contribution increases and created “safe harbors” for 401(k) plan sponsors that introduced these auto features.

The advent of defined contribution plans has created the need to educate employees about these plans for them to make informed investment decisions. The likelihood that employees will utilize an employer-provided online advisory service is examined. Employees who received an email on the availability of the advisory service are more likely to use it than those receiving a hard copy version of the mail. Lack of time is the main reason why participants did not avail of the service.

This chapter examines mechanisms used by retired and retiring individuals in a defined contribution pension plan to finance retirement income flows. The study draws on the mechanisms used by Teachers Insurance and Annuity Association-College of Retirement Equities Fund participants. The introduction of non-annuity income options led to a decline in the use of immediate life-contingent annuity payments. The types of income options chosen by participants varied over time and demographic characteristics.

Multipillar social security systems consist of two parts: a privately managed funded defined contribution (DC) plan that handles workers' retirement saving and a publicly managed, tax-financed defined benefit plan that prevents poverty, equalizes more broadly, and diversifies risk. The DC plan is, by definition, contributory and designed to ensure that workers' standard of living will not drop dramatically in old age. Some countries impose few constraints on investments or payouts, while other countries impose large constraints to protect ill-informed or myopic workers from making mistakes. The public benefit has varying degrees of links to contributions in different countries. In some cases (e.g. Australia) it is mainly redistributive and financed by general revenues, while in other cases (e.g. the notional defined contribution plans in Sweden and Poland) a stronger link exists between benefits and payroll contributions. The Latin American public pillars offer a mixed approach that falls in between these two extremes. This chapter summarizes the key policy choices a country must make that strongly affect gender outcomes. Ultimately, value judgments are indispensable in making these choices and designing the system.

When do individuals actually improve their financial behavior in response to advice? Using survey data from current defined contribution (DC) plan holders in the RAND American Life Panel (ALP), we find little correlation between normatively desirable behaviors and advice. Results from a hypothetical portfolio-allocation choice experiment using the ALP show that unsolicited advice has no causal effect on investment behavior, yet individuals who actively solicit advice ultimately improve performance, despite negative selection on financial ability. While expanding access to advice can have positive effects (particularly for the less financially literate), more extensive compulsory programs of financial counseling may be less effective.

This chapter outlines ways of building a bigger and better retirement income system in the United States. It first traces the evolution of today's retirement programs, focusing on Social Security and defined contribution plans. It then discusses the challenges involved in making decisions concerning retirement savings, as well as the impact of the financial crisis on retirement plans. The chapter also assesses the impact of recent public policies aimed at reforming the existing retirement income system and considers a new tier of individual retirement saving accounts that would replace approximately 20 percent of a worker's pre-retirement income. Finally, it compares this tier with Social Security and concludes that the latter is a better option in which to invest equities.