MIT Golub Center for Finance and Policy
Public Policy
How Much Can Collective Defined Contribution Plans Improve Risk-Sharing?
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In a new paper, How Much Can Collective Defined Contribution Plans Improve Risk-Sharing?, GCFP Director Deborah Lucas and Research Associate Daniel Smith discuss how to improve retirement plans. Rather than relying on either government subsidized defined benefit (DB) plans or more risky defined contribution (DC) plans, a collective defined contribution can provide two large benefits: low cost of investing and protection from down markets. They write:
“A Collective Defined Contribution (CDC) plan is a hybrid structure, designed to provide more predictable benefits to retirees than a traditional DC plan, while operating at the lower costs of a DB plan… A vital feature of a CDC plan is that all employer and employee contributions are invested and professionally managed in one collective pool. Benefits depend on investment performance, but uncertainty is mitigated by the sharing of investment risk across worker cohorts.”
