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New contest asks financial innovators to reinvent the retirement plan

The MIT Golub Center for Finance and Policy(GCFP) at MIT Sloan has launched a contest to solicit new ideas for retirement plans. The competition is open to students, academics, investment professionals, financial advisors, pension fund managers, and experts in asset-liability management. For participants who propose the most well-reasoned, prudent, and implementable strategies, the GCFP will distribute prizes totaling $20,000 and will transmit the winning entries to policymakers. The deadline for submissions is January 15, 2019.

The motivation for launching the contest is the declining number of pension plans offered to workers in the United States—and the crippling cost of those plans, especially to organizations in the public sector. At the same time, 401(k) plans are becoming more popular, but financial professionals are concerned about risks as employers shift responsibility of investment to employees who may not be sufficiently experienced to make investment decisions that will have a life-changing impact on their lives after retirement.

Collective Defined Contribution Plan

With the contest, the GCFP faculty hopes to inspire the invention of a third kind of retirement plan—a collective defined contribution plan(CDCP) that could alleviate the financial stresses that threaten the sustainability of the pension plans of millions of public sector workers. A key feature of this plan 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. And managing the investments in a collective pool deeply reduces costs because collective investing can be done by pension experts at institutional rates for one large and diversified asset pool.

“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,” says MIT Sloan Professor and GCFP Academic Director Deborah Lucas. “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 GCFP serves as a catalyst for innovative, cross-disciplinary, and nonpartisan research and educational initiatives that address the challenges facing governments in their roles as financial institutions and financial regulators. The center is building a foundation that will support transformative improvements in the development and execution of financial policy today and in the decades to come.

 

 

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