Collective Defined Contributions Plans

The long-term shift in the US retirement system from defined benefit pension (DB) plans to retirement saving accounts such as 401(k) plans and IRAs has transferred significant financial risks to workers, many of whom are ill-equipped to handle the contingencies. Collective defined contribution (CDC) plans offer a way to rethink risk sharing. CDCs permit employers to avoid the funding cost and volatility of guaranteed DB benefits while providing savers and retirees DB-like professional investment management and pooling, longevity risk pooling, and lifetime income. To be effective, however, CDC plans need to address issues regarding expectations, equity, transition, and trust. If they can do so successfully, adding particular CDC features to conventional DB plans or 401(k) plans in appropriate circumstances could improve outcomes for workers, retirees, and employers. Looking beyond the conventional, traditional DB and DC plan designs to explore a new, richer, and more nuanced array of risk-sharing and pooling strategies is a welcome development that will help identify more optimal allocations of financial risks and retirement benefits.