Insights Blog

How Guaranteed Retirement Accounts Work

October 22, 2016

Brief —Guaranteed Retirement Accounts would supplement an expanded Social Security.

GRAs would not compete with or supplant Social Security. As social insurance against disability and poverty in old age, Social Security must be protected and expanded.

As SCEPA Director Teresa Ghilarducci wrote in the Huffington Post, "The first step to solve the coming retirement crisis is to make Social Security solvent, without reducing benefits for lower- and middle-income persons....Instead of cutting benefits for these persons, we believe it would make more sense to expand the revenue available to finance Social Security. In our judgment, this represents a far better approach to improving retirement security for all Americans." 

GRAs are individual accounts that would supplement Social Security. Social Security was not designed nor intended to provide an individual with all the income they would need in retirement. Rather, Social Security is considered one leg of a three-legged stool. The other legs are income from a retirement plan and personal savings. Over the last 40 years, traditional employer-provided defined benefit (DB) pensions have been displaced by defined contribution (DC) plans, including 401(k)s. Not only are 401(k)s ineffective retirement savings vehicles, they are only provided to half of American workers. 

The result of this trajectory is a retirement crisis. Workers without retirement plan coverage cannot save enough for retirement. 401(k) participants are often little better off than those without any coverage, as evidenced by the numbers. Those nearing retirement, including those without access to plan, have a median retirement savings of $12,000.  

GRAs are Designed Like Traditional Pensions to Lower Fees

GRAs are designed to mimic the best practices of traditional DB pensions. DBs provide workers with the benefits of pooled savings, low fees economies of scale, and lifelong income in retirement. These characteristics also allow DB plans to provide better investment returns than 401(k)s or IRAs.

The GRA doesn't obligate fund managers to invest in private equity. It merely allows the trustees, operating under the GRA's fiduciary requirements, the opportunity to invest in private equity if it benefits the participant. DB's have proven this to be true - that the inclusion of alternative asset classes has earned participants higher returns at lower risk.

GRAs would require that private investment managers compete against each other for the work, keeping fees as low as possible. Professional fund managers, including private equity funds, are in DB funds now. The issue is not whether they should be used, but whether or not they receive excessive compensation for poor returns. The GRA ensures that taxpayers and GRA contributors are not taken advantage of and get the best possible deal. This is done through transparent governance, pooled accounts and competition – three hallmarks of DB plans.