"Your Nest Egg on Auto Pilot" 

LEWIS MANDELL, Aspen Institute - Initiative on Financial Security
Email: lewis.mandell@aspeninstitute.org
PAMELA J. PERUN, Aspen Institute - Initiative on Financial Security
Email: pamela@planetnow.com
LISA MENSAH, Aspen Institute - Initiative on Financial Security
Email: lisa.mensah@aspeninst.org
RAYMOND O'MARA III, Aspen Institute - Initiative on Financial Security
Email: raymond.omara@aspeninstitute.org

The Obama administration has proposed bold new policies to expand retirement savings. Through a program of Automatic IRAs, the approximately 78 million American workers not currently covered by a plan at work would be able to save through workplace-based individual retirement accounts. As important as money flowing into the Automatic IRA is, the central test of the Automatic IRA policy will be how much money will be available to flow out at retirement. How can the Automatic IRA insure that significant assets are built for retirement? To that end, the investment menu will be critical because it is the engine that grows contributions into retirement assets.

The Initiative on Financial Security at the Aspen Institute has designed an investment vehicle suitable for use as the default investment for the Automatic IRA. Real Savings Plus offers an automatic, inexpensive blend of TIPS and a market index to provide savers with a guaranteed return of their contributions along with the likelihood of upside potential through equity investing. Real Savings Plus thus protects the value of each dollar saved from the most likely risks to retirement income while offering the opportunity for significant growth as well.

We demonstrate in this brief that Real Savings Plus is highly likely to outperform the “R-Bond”, another proposed default investment for the Automatic IRA, in building financial assets for retirement. At the same time we show that Real Savings Plus, like the R-bond, is able to guarantee the full return of a saver’s contributions adjusted for inflation even under the worst imaginable economic circumstances. Finally, we briefly describe other benefits of Real Savings Plus beyond investment performance, such as its low-cost structure, automatic asset allocation, and potentially wide availability throughout the financial services industry.

"Investment Funds and Erisa Controlled Groups – Egregious Aggregation?" 

Pension & Benefit Reporter, Vol. 35, No. 33, pp. 1929-1934, 2008

ANDREW L. ORINGER, Hofstra University - School of Law, Ropes & Gray LLP
Email: andrew.oringer@hofstra.edu

Venture capital and other private equity funds have proliferated in recent decades, as the trend towards the pooling of investments by investment professionals has continued to grow. A lurking question that has long bubbled under the surface is whether, if a fund's ownership exceeds certain thresholds, the fund and its target acquisitions are aggregated as a single employer for certain purposes under the employee benefits provisions of the Internal Revenue Code of 1986, as amended, and under the Employee Retirement Income Security Act of 1974, as amended. The ERISA Title IV issues have attracted some particular attention over the last year, with the issuance of a certain letter from the PBGC's Appeals Board dated September 26, 2007. The 2007 PBGC letter holds that the private equity fund there at issue was a trade or business, and that its (sufficiently owned) subsidiaries were considered to be a single employer under Title IV. The PBGC determined that the fund was therefore jointly and severally liable for the underfunded liabilities of a pension plan sponsored by one of its portfolio companies. The author questions the bases given by the PBGC to reach that conclusion, and discusses certain possible impacts of the PBGC's approach.

"A Regulatory Vacuum Leaves Gaping Wounds - Can Common Sense Offer a Better Way to Address the Pain of Erisa Preemption?" 

Hofstra Labor & Employee Law Journal, Vol. 26, p. 409, Spring 2009
NYU Review of Employee Benefits and Executive Compensation, Lurie, ed., 2009

ANDREW L. ORINGER, Hofstra University - School of Law, Ropes & Gray LLP
Email: andrew.oringer@hofstra.edu

The article provides an extensive look at the subject of preemption across the benefits spectrum. It addresses the question of whether there are gaps in ERISA relating to causes of action and remedies available to participants and beneficiaries that should be filled by the courts. Alvin Lurie notes, "The age-old debate of strict construction versus judicial activism that has raged in so many sectors of the law in this country is now being replayed in this arena. [Reading Oringer's] article . . . on the 'pain of ERISA preemption' is compulsory of anyone wanting to engage in that debate or merely to be informed without engagement."

"Fees and Trading Costs of Equity Mutual Funds in 401(K) Plans and Potential Savings from ETFs and Commingled Trusts" 

RICHARD W. KOPCKE, Federal Reserve Bank of Boston
Email: richard.kopcke@bos.frb.org
FRANCIS VITAGLIANO, Boston College - Center for Retirement Research
Email: vitaglif@bc.edu
ZHENYA KARAMCHEVA, Center for Retirment Research at Boston College
Email: zhenya.karamcheva@bc.edu

As the role of 401(k) and similar defined-contribution plans continues to expand in our retirement system, plan participants are paying more of the cost of financing their retirement income. This study analyzes the trading costs and fees of the 100 largest domestic equity mutual funds held in defined-contribution pension plans for the years 2004 through 2008. The pricing of the actively managed funds in this sample cost the average plan 0.70 of a percentage point or more in annual returns. By shifting investment options from managed mutual funds to exchange-traded funds (ETFs) or commingled trusts, 401(k) plans can align the fees they pay more closely with the expense of the services they use. This realignment can allow an average plan to reduce its administration and management fees between 0.20 and 0.40 percent of assets. In addition, the shift to ETFs and commingled trusts that hold ETFs can reduce average trading costs 0.50 percent of assets or more for participants holding managed equity mutual funds. The fees and trading costs of the domestic equity funds in this sample are not correlated with the performance of the funds. The funds with the greatest expenses tended to divide evenly between those funds that outperformed and those that underperformed the market by the largest margins.

"A Utility-Based Comparison of Pension Funds and Life Insurance Companies under Regulatory Constraints" 

AN CHEN, Department of Economics, University of Bonn
Email: an.chen@uni-bonn.de
DIRK BROEDERS, De Nederlandsche Bank
Email: d.w.g.a.broeders@dnb.nl
BIRGIT KOOS, Department of Economics, University of Bonn
Email: birgit.koos@uni-bonn.de

This paper compares two different types of annuity providers, i.e. defined benefit pension funds and life insurance companies. One of the key differences is that the residual risk in pension funds is collectively borne by the beneficiaries and the sponsor's shareholders while in the case of life insurers, it is borne by the external shareholders.

This paper employs a contingent claim approach to evaluate the risk return trade-off for annuitants. For that, we take into account the differences in contract specifications and in regulatory regimes. Mean-variance-skewness analysis is conducted to determine annuity choices of consumers. We calibrate the regulatory default probabilities such that the consumer is indifferent between a pension fund and a life insurer. The consumer's risk aversion level appears to play a crucial rule in this.

"Tax Reform and Retirement Saving Incentives: Take-Up of Stakeholder Pensions in the UK" 

Economica, Vol. 77, Issue 306, pp. 213-233, April 2010

RICHARD F. DISNEY, University of Nottingham, Institute for Fiscal Studies (IFS), Axia Economics
Email: richard.disney@nottingham.ac.uk
CARL EMMERSON, Institute for Fiscal Studies (IFS)
Email: CARL.EMMERSON@IFS.ORG.UK
MATTHEW WAKEFIELD, affiliation not provided to SSRN

In April 2001, the UK government introduced Stakeholder Pensions – a new private pension arrangement. The reform also changed the structure of tax-relieved pension contribution ceilings, increasing their generosity for lower-earners. We examine the impact of these changes on private pension coverage using individual level data. We use a difference-in-differences strategy with an estimator that is modified to allow for dichotomous outcomes. Contrary to the conventional wisdom that the Stakeholder Pension reforms had little or no impact on saving behaviour, our results indicate that the change to the contribution ceilings affected private pension coverage rates among lower-earners, especially among women.