Retirement plan

If politicians aren’t ready to take action on improving the retirement situation in this country, MIT is.

The Golub Center for Finance and Policy at the Massachusetts Institute of Technology is launching a contest to come up with strategic proposals that could make retirement plans better for public-sector workers. In fact, they’re putting their money where their mouth is: a $20,000 prize is up for grabs for winners “who propose the most well-reasoned, prudent and implementable strategies.”

The contest is open not just to financial advisory professionals, but also to students, academics, pension fund managers and experts in asset-liability management.

Considering that the drop in defined benefit plans and the rise of defined contribution plans in the private sector has led to a rising number of workers who are ill prepared for retirement, the contest seems like a good idea — particularly since the persistence of DB plans in the public sector may not be all that secure.

Such plans have their own troubles, including unfunded liabilities for state and city pension plans. Says MIT, “[T]he shortfall between the present value of plan assets and future benefits owed … is estimated to exceed $5 trillion.”

Still, thus far the public sector has resisted switching to DC plans for a range of reasons, including the fear of shifting investment responsibility from employer to employees. Not only could employees make poor choices because of limited financial knowledge, they could end up broke in retirement.

Hence the contest, aimed at developing a third type of retirement plan that manages risk better than DC plans while providing lower operating costs than a DB plan. Says the report, “One potential alternative has been described as a collective defined contribution plan (CDCP). The contest underway at MIT seeks proposals for operationalizing such an alternative approach to public sector retirement funding.”

Contest sponsor and MIT Sloan Senior Lecturer Robert Pozen says in a statement that “[a] key feature of a CDCP is that all employer and employee contributions are invested and managed in one collective pool. Benefits depend on investment performance, but risk sharing across multiple generations of retirees increases the predictability of benefit payments.”

“The goal of the contest is to find the highest level of scheduled benefits that a well-structured CDCP is likely to deliver to retirees,” MIT Sloan Professor and GCFP Academic Director Deborah Lucas says in a statement. Lucas adds, “We’re looking for input on an investment strategy and risk-sharing policy that could be followed by CDCP managers to provide retirees with the highest achievable scheduled benefits subject to the limits on the probability and severity of benefit shortfalls.”

The contest is now open and submissions will be accepted through Jan. 15, 2019. For more information, visit the contest website at http://gcfp.mit.edu/cdcpcontest/.