A legislative template for a modernized public sector defined contribution plan

Outline of the model defined contribution plan

This model legislation is intended to provide a policy-driven framework for state and local governments to create a new (or improve an existing) defined contribution (DC) retirement system for public employees. The legislation uses Retirement Benefit Policy Statements to establish the purpose and objectives of the plan sponsor and as directives to the fiduciary and other entities charged with the ongoing administration of the program. This approach is consistent with modern trust law practices to clearly define the plan sponsor’s objectives for the plan and trust as necessary guidance to plan fiduciaries and administrators in their duties. This cutting-edge, next-generation DC system framework is an emerging policy-based plan design that synthesizes the best aspects of the defined benefit (DB) pension and DC retirement models.

This model legislation sets the major elements for the retirement plan, including provisions regarding employee eligibility and participation, vesting, contribution amounts, investment structures, benefit forms, recordkeeper structures, and plan governance and administration. The model legislation also requires communicating with and educating plan participants on the plan and the shared responsibility of employers and employees in creating a successful retirement program. It requires participants to be checked periodically to assess whether each participant is on track to meet their retirement needs and objectives, and to recommend corrective actions.

Key features include:

• A core IRC Section 401(a) defined contribution platform forms the primary vehicle for the mandatory features of the plan. One or a combination of additional voluntary savings plans (IRC Section 401(k), 403(b), and eligible 457(b) DC plans) can be used to create an integrated system of plans as needed.
• Mandatory participation to eliminate the inherent weaknesses of voluntary-only savings approaches.
• A defined retirement income target:
  • The DC plan starts with a specified retirement income replacement objective defined by the employer (similar to a DB plan, except that there are no employer guarantees of reaching the targeted income level so there is no chance to accrue unfunded pension liabilities of any kind).
• A defined contribution rate:
  • Total employer and employee contributions are defined based on what is determined to be necessary to provide that retirement income objective and are paid into a personal individual retirement account that belongs to the employee.
  • [Note: Matching employer contributions may also be considered but are not a best practice for a core plan intended to provide substantial accruals for a broad class of employees.]
• Short or immediate vesting rules to reduce the risk of benefit forfeiture.
• A professionally managed set of investment offerings:
  • The individual accounts’ assets are default invested in professionally managed funds that are designed to create high probabilities of meeting the retirement income objective based on available demographic and financial information for each participant and do not require decisions from the employee.
  • An alternative investment menu of diversified funds allows participants to personally direct their plan investments with plan-provided investment advice and counseling.
• A mobile benefit:
  • Ultimately, the assets in the account are owned by the employee and can be taken with them if they leave employment before completing a full career.

• A default benefit payment structure provides lifetime income benefits through group in-plan annuity products with additional options (lump-sum, periodic payments, etc.) that can be customized by each participant to meet their own individual needs and circumstances.

Part 2 provides model language for enacting this legislation.

Full Template: A legislative template for a modernized public sector defined contribution plan