Report to the Chairman, Committee on 

Education and Labor, House of 

Representatives 

United States Government Accountability Office

GAO 

July 2009 PRIVATE PENSIONS

Alternative 

Approaches Could 

Address Retirement 

Risks Faced by 

Workers but Pose 

Trade-offs 

GAO-09-642 

This report was revised on September 1, 2009, to correct table 

12, row 1, column 4 – “The Baseline results, Household annuity 

equivalent (per year, 2008 dollars) for income quartile 2 should 

be $7,780.” 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2009

PRIVATE PENSIONS

Alternative Approaches Could Address Retirement 

Risks Faced by Workers but Pose Trade-offs

Highlights of GAO-09-642, a report to the 

Chairman, Committee on Education and 

Labor, House of Representatives 

Recent losses in the stock market 

and poor economic conditions 

underscore that many U.S. workers 

are at risk of not having an adequate 

income in retirement from pension 

plans. The dramatic decline in the 

stock market has diminished 

pension savings and reportedly led 

to low levels in older Americans’ 

confidence in their ability to retire. 

Even before the current economic 

recession, research indicated that 

pension benefits are likely to be 

inadequate for many Americans. 

This report addresses the following 

questions: (1) What are key risks 

faced by U.S. workers in 

accumulating and preserving 

pension benefits? (2) What 

approaches are used in other 

countries that could address these 

risks and what trade-offs do they 

present? (3) What approaches do 

key proposals for alternative plan 

designs in the U.S. suggest to 

mitigate risks faced by workers and 

what trade-offs do they entail? 

To complete this work, we 

reviewed research on defined 

benefit and defined contribution 

plans, and interviewed pension 

consulting firms, industry experts, 

academics, and other relevant 

organizations in the U.S. and 

abroad. In addition, we used a 

microsimulation model to assess 

the impact of certain strategies to 

increase pension coverage on 

accumulated benefits. 

The Department of Labor and 

Department of Treasury provided 

technical comments on this report. 

U.S. workers face a number of risks in both accumulating and preserving 

pension benefits. Specifically, workers may not accumulate sufficient 

retirement income because they are not covered by a defined benefit (DB) or 

defined contribution (DC) pension plan. For example, according to national 

survey data, about half of the workforce was not covered by a pension plan in 

2008. Furthermore, workers covered by DC plans, in particular, risk making 

inadequate contributions or earning poor investment returns, while workers 

with traditional DB plans risk future benefit losses due to a lack of portability 

if they change jobs. Preretirement benefit withdrawals (leakage), high fees, 

and the inappropriate drawdown of benefits in retirement also introduce risks 

related to preserving benefits, especially for workers with DC plans. 

Key Risks in Accumulating and Preserving Pension Benefits

Sources: GAO analysis; images, Art Explosion.

Workers’ career Retirement

$ Accumulation $ $ $ $ $

Insufficient 

contributions

Poor

investment

returns 

Lack of 

coverage

Preservation

Leakage High fees 

Lack of 

portability

Inappropriate 

drawdown of benefits

The private pension systems of the Netherlands, Switzerland, and the United 

Kingdom represent alternative approaches to address these key risks, but they 

also pose trade-offs to consider in applying them in the U.S. We selected these 

countries from a larger group after an initial review indicated that their private 

pension systems addressed many of the risks that U.S. workers face and had 

the potential to yield useful lessons for the U.S. experience. Their systems 

offer ideas for mitigating risks in accumulating and preserving benefits, such 

as mandating coverage, sharing investment risk among workers and 

employers, restricting leakage, and using annuities to drawdown benefits. 

However, these approaches pose trade-offs. For example, in the Dutch and 

Swiss systems, sharing investment risk requires assets to be pooled and thus 

limits individual choice. Additionally, while annuitizing benefits at retirement 

can mitigate longevity risk, doing so also limits retirees’ access to their assets. 

Several proposals for alternative pension plan designs in the U.S. incorporate 

approaches to mitigate the risks faced by workers, such as incentives to 

increase voluntary coverage or mandating annuitization. However, these 

approaches also pose trade-offs and costs for workers and employers, and in 

some cases the federal government. In particular, important trade-offs arise 

with mandating coverage and contributions, guaranteeing investment returns, 

and annuitizing benefits. For example, mandatory approaches reduce risks but 

also raise concerns about the impact of higher benefit costs, particularly on 

small employers. 

View GAO-09-642 or key components.

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 
Page i GAO-09-642 Private Pensions 

Letter 1

Background 3 

U.S. Workers Face a Number of Risks in Accumulating and 

Preserving Pension Benefits 9 

Other Countries’ Experiences Offer Alternative Approaches for 

Addressing Risks Faced by U.S. Workers but also Involve Tradeoffs 20 

Domestic Proposals Incorporate Different Approaches to Reduce 

Retirement Risks to Workers but also Pose Trade-offs 36 

Concluding Observations 54 

Agency Comments and Our Evaluation 55 

Appendix I Scope and Methodology 57 

Appendix II Examples from Private Sector Pension Systems in the 

United Kingdom, the Netherlands, and Switzerland 66 

Appendix III Summary of Administrative and Legal 

Changes Associated with Key Domestic Proposals 69 

Appendix IV GAO Contact and Staff Acknowledgments 70 

Related GAO Products 71 

Tables 

Table 1: Estimated Social Security Replacement Rates for Workers 

Turning 65 in 2009 and in 2055, Percentage of CareerAverage Earnings 6 

Table 2: Demographic and Economic Data for the United States, 

Netherlands, Switzerland, and the United Kingdom 8 

Table 3: Key Factors Affecting Accumulation of Benefits in 

Common DB and DC Plans 11 

Contents 
Table 4: Key Factors That Affect the Preservation of Benefits in 

Common DB and DC Plans 15 

Table 5: Private Pension Systems in the Netherlands, Switzerland, 

and the United Kingdom 20 

Table 6: Total and Distribution of Contributions to Private Pension 

Plans in the United Kingdom, the Netherlands, and 

Switzerland, 2009 24 

Table 7: Key Domestic Proposals for Alternative Pension Plan 

Designs 37 

Table 8: The Super Simple Saving Plan’s Approaches to Coverage 

and Contributions 39 

Table 9: The New Benefit Platform for Life Security’s Approaches 

to Coverage, Portability, and Investments 41 

Table 10: The Universal 401(k) Plan’s Approaches to Coverage, 

Contributions, Investments, and the Drawdown of Benefits 

in Retirement 42 

Table 11: The Guaranteed Retirement Accounts Plan’s Approaches 

to Coverage, Contributions, Investments, and the 

Drawdown of Benefits in Retirement 44 

Table 12: Projected Average Household Annuity Equivalents and 

Projected Percentage of Workers with DC Savings at 

Retirement, by Income, under Different Scenarios 53 

Table 13: Projected Average Household Annuity Equivalents and 

Projected Percentage of Workers with DC Savings at 

Retirement, by Income, under Different Scenarios 63 

Table 14: Sample Summary Statistics, PENSIM 1990 Cohort, 

Medians 65 

Table 15: Administrative and Legal Changes Associated with Key 

Domestic Proposals for Alternative Pension Plan Designs 69 

Figures 

Figure 1: Sources of Income for Households Aged 65 and Older, 

2006 5 

Figure 2: Effect of a 1 Percentage Point Higher Annual Fee on a 

$20,000 401(k) Balance Invested over 20 years 18 

Figure 3: Risk-sharing through Conditional Indexation of DB 

Pension Benefits in the Netherlands 29 

Page ii GAO-09-642 Private Pensions
Abbreviations 

DB defined benefit 

DC defined contribution 

ERISA Employee Retirement Income Security Act 

GDP gross domestic product 

GRA guaranteed retirement account 

IRA Individual Retirement Account 

OECD Organisation for Economic Co-operation and Development 

PENSIM Policy Simulation Group Pension Simulator 

PSG Policy Simulation Group 

U.K. United Kingdom 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately. 

Page iii GAO-09-642 Private Pensions
Page 1 GAO-09-642 

 

United States Government Accountability Office

Washington, DC 20548 

 

July 24, 2009 

The Honorable George Miller 

Chairman 

Committee on Education and Labor 

House of Representatives 

Dear Mr. Chairman: 

Recent losses in the stock market and poor economic conditions 

underscore that many U.S. workers are at risk of not having an adequate 

income in retirement. The dramatic decline in the stock market has 

diminished pension savings, a key component of retirement income, and 

has led to low levels in older Americans’ confidence in their ability to 

retire. However, even before the current economic recession, research 

indicated that pension savings are likely to be inadequate for many 

Americans, particularly low-income workers. Over the last two decades, 

much of the risk and burden of financing retirement has shifted from 

employers to employees as pension coverage has moved away from 

traditional defined benefit (DB) plans, in which workers typically accrue 

benefits based on years of service and earnings, in favor of defined 

contribution (DC) plans, in which participants accumulate balances in 

self-directed individual accounts, such as 401(k)s. Yet despite the increase 

in the number of DC plans, a considerable number of workers still lack 

pension coverage through their employer. Even many workers who do 

have a pension may still fall short of sufficient pension benefits to 

maintain their standard of living in retirement due to a reliance on the 

financial health of the employer and other factors. This outcome has led 

some industry experts to conclude that the U.S. pension system is in need 

of new options to address the risks workers face in securing an adequate 

retirement income from pension plans.1

A number of other countries have made modifications to their private 

pension systems in an attempt to address risks faced by their workers. In 

addition, pension experts and organizations in the United States have 

developed proposals for alternative designs to address some of the risks 

1

The Joint Committee on Taxation reported that federal tax expenditures for pension plans 

are estimated to be $98 billion in 2009. Federal tax expenditures consist of forgone tax 

revenue from deferrals on employer and employee contributions and investment earnings 

in qualified pension plans net of taxes paid on pension distributions. 

Private Pensions 
 

and limitations of employer-based DB and DC pension plans. In order to 

develop strategies to improve the retirement security of America’s 

workers, you asked us for information about how alternative plan designs 

address the risks associated with accumulating and preserving pension 

benefits. Specifically, you asked us to answer the following questions: 

1. What are key risks faced by U.S. workers in accumulating and 

preserving pension benefits? 

2. What approaches are used in other countries that could address these 

risks and what trade-offs do they present? 

3. What approaches do key proposals for alternative plan designs in the 

U.S. suggest to mitigate risks faced by workers and what trade-offs do 

they entail? 

To identify key risks faced by workers from traditional DB and DC plans, 

we reviewed research and interviewed industry experts, pension 

consulting firms, academics, and other relevant organizations. The scope 

of this study is limited to risks faced by workers directly related to their 

pension benefits and does not focus on other significant but more indirect 

risks to retirement security, such as the loss of retiree health care 

coverage, rising Medicare premiums, or higher-than-expected health care 

costs in retirement. To identify approaches used in other countries that 

could address risks in the U.S. pension system, we examined the 

employer-sponsored pension systems of three countries: the Netherlands, 

Switzerland, and the United Kingdom (U.K.). We selected these countries 

after an initial review of employer-sponsored pension plans in countries 

that belong to the Organisation for Economic Co-operation and 

Development (OECD). In that review, we assessed each country’s pension 

system based on the risks identified in the first objective and the potential 

for yielding useful lessons for the U.S. experience. For each of the three 

selected countries, we reviewed available documentation and research 

and analyzed the plan designs based on the risks workers face. We 

interviewed pension experts and government officials in each country, as 

well as academics and other experts based in the United States, about 

each plan’s strengths, weaknesses, trade-offs, and lessons learned for the 

U.S. To identify the key proposals for alternative pension plan design in 

the United States, we reviewed available documentation and interviewed 

national retirement policy experts. We selected four proposals that 

incorporate strategies to address risks workers face, were developed in 

enough detail to allow us to fully analyze them, were not duplicative, and 

have been proposed or considered in the last 5 years. In addition, we 

Page 2 GAO-09-642 Private Pensions
 

assessed two other proposals that specifically focused on increasing the 

use of annuities in DC plans. We reviewed each proposal and interviewed 

their authors to evaluate the strengths, weaknesses, and trade-offs of each 

proposal, as well as the legal or institutional changes they would require. 

We also reviewed related research and interviewed pension experts about 

the approaches used in the proposals. In addition, we used a 

microsimulation model, PENSIM, to assess the impact of certain 

strategies, including requiring all employers that do not currently offer a 

pension plan to sponsor a DC plan with no employer contribution (i.e., 

universal access), on accumulated benefits.2

 These strategies are used in 

some of the proposals we reviewed, but do not represent any proposal in 

its entirety. PENSIM has been used by GAO, the Department of Labor, 

other government agencies, and private organizations to analyze lifetime 

coverage and adequacy issues related to employer-sponsored pensions in 

the United States3

 For additional information on the methodology used for 

this review, see appendix I. 

We conducted this performance audit from August 2008 to July 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Pension plans offered by private employers in the United States operate in 

a voluntary system with tax incentives for workers to participate in plans 

that employers offer. Employers may choose to offer different types of 

plans which fall into two broad categories: defined benefit (DB) and 

defined contribution (DC). A DB plan is generally financed by the 

employer and typically provides retirement benefits in the form of an 

annuity that provides a guaranteed monthly payment for life, the value of 

Background 

 

2

PENSIM is a pension policy simulation model that has been developed for the Department 

of Labor to analyze lifetime coverage and adequacy issues related to employer-sponsored 

pensions in the United States. See app. I for detailed information about the projections and 

input assumptions used to produce the results in this report. 

3

See, for example, GAO Private Pensions: Low Defined Contribution Plan Savings May 

Pose Challenges to Retirement Security, Especially for Many Low-Income Workers, 

GAO-08-8 (Washington, D.C.: Nov. 29, 2007) and Private Pensions: Information on Cash 

Balance Pension Plans, GAO-06-42 (Washington, D.C.: Nov. 3, 2005). 

Page 3 GAO-09-642 Private Pensions
 

which is determined by a formula based on salary and years of service.4

DB plans can include hybrid plans, such as cash balance plans.5

 In a DC 

plan workers and/or employers make contributions into individual 

accounts set up for each participant. Most DC plans allow participants to 

direct these contributions to mutual funds and other financial market 

investments to accumulate pension benefits, dependent on net investment 

returns, which will then be withdrawn during retirement. Over the last two 

decades, the number of DB plans has declined substantially while the 

number of DC plans has increased. In 2007, about half of private sector 

workers participated in employer-sponsored pension plans; 21 million had 

a DB plan and more than 40 million had a DC plan. 

Research suggests that retirement income from pension plans is likely to 

be inadequate for many workers in the United States. In recent years, a 

considerable number of DB plans have been terminated or closed to new 

participants, which prevents workers from accruing further benefits in 

those plans in most cases. For those with DC plans, data gathered before 

the recent financial crisis indicate that many workers have low balances.6

One study found that in 2007, median combined balances in 401(k) plans 

and Individual Retirement Accounts (IRA) were only $78,000 for 

individuals aged 55 to 64.7

 In the past year, poor investment returns have 

led to considerable losses in many workers’ DC plans, leaving them at an 

even greater risk for having inadequate savings for retirement. 

In addition to pension plans, retirees depend on other sources of income 

in retirement. Social Security benefits provide the largest source of 

retirement benefits for most households. In 2006, Social Security benefits 

 

4

DB plans offer benefits in the form of an annuity; however, a DB plan may also provide 

workers the option of receiving their benefits as a lump sum distribution. 

5

Cash balance plans are referred to as hybrid plans because legally they are DB plans but 

contain certain features that resemble DC plans. As with traditional DB plans, employers 

that sponsor a cash balance plan make contributions to a pension trust fund that is 

invested on behalf of the employees in the plan. However, unlike traditional DB plans that 

express retirement benefits as an annuity amount calculated using years of service and 

earnings, cash balance plans express benefits as a hypothetical individual account balance 

that is based on pay credits (percentage of salary or compensation) and interest credits, 

rather than an annuity. 

6

GAO-08-8. 

7

Alicia Munnell, Francesca Golub-Sass, and Dan Muldoon, “An Update on 401(k) Plans: 

Insights from the 2007 SCF,” Center for Retirement Research at Boston College, March 

2009. 

Page 4 GAO-09-642 Private Pensions
 

provided almost 37 percent of total income compared to 18 percent 

provided by pension income in households with someone aged 65 or older, 

excluding nonannuitized payments or lump-sum withdrawals.8

 As seen in 

figure 1, income from other sources, such as asset income (e.g., interest 

and dividends) and earnings from working during retirement, are also 

important for households aged 65 and older.9

ngs from working during retirement, are also 

Figure 1: Sources of Income for Households Aged 65 and Older, 2006 

15%

28%

18%

37%

Source: U.S. Social Security Administration, Office of Retirement and Disability Policy Income of the Population 55 or Older, 2006. 

2% Other

1% Cash public assistance

Social Security

Income from assets

Pension income

Employment earnings

•

•

•

•

•

•

Note: Data reported by the Social Security Administration for pension income includes regular 

payments from IRAs, Keogh, or 401(k) plans. Nonregular (nonannuitized or lump-sum) withdrawals 

from IRA, Keogh, and 401(k) plans are not included as income. 

There is little consensus about how much constitutes “enough” savings for 

retirement. Retirement income adequacy may be defined relative to a 

standard of minimum needs, such as the poverty rate, or to the level of 

 

8

Data reported by the Social Security Administration for pension income includes regular 

payments from IRAs, Keogh, or 401(k) plans. Nonregular (nonannuitized or lump-sum) 

withdrawals from IRA, Keogh, and 401(k) plans are not included as income. 

9

Asset income includes income from interest, dividends (from stock holdings and mutual 

fund shares), rent, royalties, and estates and trusts. Sources of asset income may include 

IRAs and other savings. Capital gains from the sale of stock are not included as income. 

Page 5 GAO-09-642 Private Pensions
 

spending households experienced during working years. Some economists 

and financial advisors consider retirement income adequate if the ratio of 

retirement income to preretirement income—called the replacement 

rate—is between 65 percent and 85 percent.10 Retirees may not need to 

replace 100 percent of preretirement income to maintain living standards 

for several reasons. For example, retirees will no longer need to save for 

retirement and their payroll and income tax liability will likely fall. 

However, some researchers cite uncertainties about future health care 

costs and future Social Security benefit levels as reasons to suggest a 

higher replacement rate may be necessary.11 Table 1 shows estimated 

replacement rates from Social Security benefits for low and high earners 

who retire in 2009 and 2055, as well as the remaining amount of 

preretirement income necessary to achieve a 75 percent replacement 

rate.12

Table 1: Estimated Social Security Replacement Rates for Workers Turning 65 in 2009 and in 2055, Percentage of CareerAverage Earnings 

Year in which a 65-year-old retires 

2009 2055 

Source of replacement rate income 

Low earners’ 

replacement rate

High earners’ 

replacement rate

Low earners’ 

replacement rate

High earners’ 

replacement rate

Social Security 54.0 33.2 49.0 30.1

Replacement rate from other sources to 

achieve 75 percent replacement rate 

21.0 41.8 26.0 44.9

Source: The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability 

Insurance Trust Funds. Table VI.F10. 

 

10The replacement rate generally refers to the ratio of retirement income to preretirement 

income, but specific calculations of replacement rates can vary. For example, the measure 

of preretirement income could be based on final pay or a longer term average of pay. 

11See, for example, Jonathan Skinner, “Are You Sure You’re Saving Enough for Retirement,” 

Journal of Economic Perspectives, vol. 21, no. 3, Summer 2007, 59-80; Congressional 

Budget Office, Baby Boomers’ Retirement Prospects: An Overview, November 2003. 

12Due to the long-term fiscal challenges facing Social Security, options for reform may 

result in lower benefits and reduced replacement rates from Social Security. As a result, 

reforms to the Social Security system may increase the need for retirement income from 

other sources such as private pensions. See GAO Social Security Reform: Answers to Key 

Questions, GAO-05-193SP (Washington, D.C.: May 2005.) 

Page 6 GAO-09-642 Private Pensions
 

Note: Based on scheduled benefits under intermediate assumptions of Social Security projections. 

Replacement rates represent benefits as a percentage of career-average earnings for low and high 

earners. A “low earner” is someone whose career average earnings are about 45 percent of the 

national average wage index (AWI), while a “high earner” has career average earnings of about 160 

percent of AWI. Estimated benefits based on intermediate Social Security Trust Fund assumptions. 

The AWI in 2009 is $42,041.84. 

These figures give rough guidelines for how much income retirees may 

need from sources other than Social Security, such as employer-sponsored 

pensions and personal savings. In 2007, we reported that DC plans could, 

on average, replace about 22 percent of annualized career earnings at 

retirement, but these projected replacement rates vary widely across 

income groups with many low-income workers having little or no pension 

plan savings at retirement.13 In an effort to increase personal savings for 

retirement, the President’s 2010 budget includes a proposal targeted at 

workers who are not covered by an employer-sponsored pension plan.14

Under this proposal, employers who sponsor a pension plan but exclude 

some portion of their employees from it would be required to 

automatically enroll the excluded workers into an IRA. However, the 

proposal does not mandate employer contributions. 

Other countries share some of the same risks faced by their own workers 

in saving for retirement. The Netherlands, Switzerland, the United 

Kingdom, and the United States each have extensive private pension 

systems. However, in drawing comparisons between countries, it is 

important to recognize social and economic differences. As seen in table 2, 

compared to the United States, each of these countries has a smaller 

population with a higher share of individuals aged 65 and older. In 

addition, the size of each country’s economy is smaller than that of the 

United States as measured by the per capita gross domestic product 

(GDP). While the economies of the Netherlands, Switzerland, and the 

United Kingdom can be characterized as market based, they generally 

include more extensive and generous social welfare provisions than that 

of the United States. 

 

13GAO-08-8. 

14Budget of the United States Government, Fiscal Year 2010, “A New Era of Responsibility: 

Renewing America’s Promise” (Washington, D.C., Feb. 26, 2009). 

Page 7 GAO-09-642 Private Pensions
 

Table 2: Demographic and Economic Data for the United States, Netherlands, 

Switzerland, and the United Kingdom 

Population GDP per capita

Ratio of population aged 65 

and older to total population 

2007 2007 2007 2030

United States 301,621,000 $45,489 12.6 19.7

Netherlands 16,381,000 39,225 14.6 23.4

Switzerland 7,550,000 41,102 16.3 23.9

United Kingdom 60,975,000 35,669 16.0 21.9

Source: OECD Country Statistical Profile. Data extracted on May 11, 2009, from OECD Stat. 

http://stats.oecd.org/WBOS/Index.aspx?DataSetCode=CSP2009

Note: GDP per capita is based on purchasing power parity, which equalizes the purchasing power of 

different currencies in their home countries by taking into account the relative cost of living and the 

inflation rates of different countries, rather than just a nominal GDP comparison. 

The private pension systems in the Netherlands, Switzerland, and the 

United Kingdom are designed to replace an adequate amount of income 

during retirement for the majority of the population. Key features of each 

country’s system include the following: 

• In the Netherlands, more than 90 percent of the workforce is covered by a 

private pension. Pension plans may be provided by individual employers 

or entire industries, either directly or though insurance providers. Most 

pension plans are DB plans, although since the early 2000s, almost all have 

changed from traditional final average pay DB plans to career average DB 

plans.15 Private pensions are intended to supplement public pension 

benefits provided by the government, and together the goal of these two 

components is to replace 70 percent of preretirement earnings. 

• In Switzerland, private pension plans cover over 90 percent of the 

workforce. Most pensions are DB plans, which use a cash balance 

formula. Plans can be offered by individual employers or a group of 

employers in an industry or locality, either directly or through an 

insurance provider. The public and private pension systems are integrated, 

and the overall goal of the two components is to replace 60 percent of 

preretirement earnings. 

 

15Final pay DB plans calculate benefits using average earnings in the final years of 

employment, whereas career average DB plans calculate benefits on the average earnings 

in all years of employment. 

Page 8 GAO-09-642 Private Pensions
 

• In the United Kingdom, the private pension system currently covers 

approximately 33 percent of the workforce. Similar to the United States, 

most plans in the United Kingdom are DC plans. The United Kingdom has 

enacted major public and private pension reforms in recent years that are 

intended to increase retirement saving among low- and middle-income 

workers. Reforms intended to expand the private pension system to 

ensure a minimum standard of living in retirement for most workers are 

scheduled go into effect in 2012. Although some of the details of the new 

system are currently under development, officials in the United Kingdom 

told us that the median earner’s retirement income from the public and 

private pensions combined is expected to replace 45 percent of 

preretirement earnings.16

U.S. Workers Face a 

Number of Risks in 

Accumulating and 

Preserving Pension 

Benefits 

Workers Face Risks 

Accumulating Pension 

Benefits Related to 

Coverage, Contributions, 

and Investment Returns 

In securing an adequate income for retirement, workers face risks due to 

several factors that determine the amount of pension benefits 

accumulated. Workers may not accumulate sufficient benefits due to lack 

of pension coverage and inadequate contributions, as well as poor 

investment returns. 

Many workers face the risk of not accumulating sufficient retirement 

income from pension plans because they lack consistent coverage 

throughout their career. Everything else equal, fewer years of plan 

coverage reduce the amount of pension benefits accumulated for 

retirement. According to March 2008 data from the National Compensation 

Survey (NCS), 49 percent of the private sector workforce was not covered 

Coverage 

 

16Retirement income replacement rates are not directly comparable across countries 

because differences in each country’s social security, health care, welfare and tax systems 

influence the level of income security they provide. 

Page 9 GAO-09-642 Private Pensions
 

by a pension plan.17 Coverage rates tend to be lower for part-time and lowincome workers and those employed at small firms. For example, NCS 

data indicate that 60 percent of full-time workers were covered by a plan 

compared to only 23 percent of part-time workers. Similarly, 76 percent of 

those who work for an employer with 500 workers or more were covered 

by a plan compared to 34 percent of those who work for an employer with 

less than 50 workers. 

Whether or not a worker is covered by a pension plan depends on both 

access and participation. For workers to have access to a plan, their 

employer must sponsor a plan and workers must be eligible under the 

plan’s rules.18 Access to a plan is lower among part-time and low-income 

workers, and those who are employed at small firms. Participation 

features, though, vary for DB and DC plans (see table 3). While all eligible 

workers participate in a DB plan, workers may decide not to participate in 

DC plan. Thus, for workers who have access to a DC plan, coverage is also 

dependent on whether a worker participates. One study reports that 56 

percent of private sector workers had access to a DC plan in 2006 but only 

about 40 percent participated.19 Younger workers and low-income workers 

are less likely to choose to participate in a DC plan. Several experts we 

interviewed noted that automatic enrollment, which a growing number of 

DC plans have adopted, has been shown to increase participation because 

workers are required to opt out of, rather than opt into, their plan. Thus, if 

a worker fails to make an active decision about participating in the plan, 

under automatic enrollment he or she will participate by default. The longterm effect of automatic enrollment, however, has yet to be determined.20

 

17The NCS is an annual survey of establishments conducted by the U.S. Department of 

Labor’s Bureau of Labor Statistics, which provides comprehensive data on the incidence 

and provision of selected employee benefit plans, such as pensions. 

18DB and DC plans may exclude employees who do not work at least 1,000 hours in a year 

(i.e., never complete 1 year of service) but may not exclude part-time employees. Plans 

may also exclude hourly employees or certain salaried employees within a specific job 

classification. However, eligible employees must be allowed to participate in the plan as of 

age 21 and after completing 1 year of service, subject to certain exceptions. 

19Patrick Purcell, “Retirement Plan Participation and Contributions: Trends from 1998 to 

2006,” Congressional Research Service, January 30, 2009, www.crs.gov. 

20A forthcoming GAO report will provide recent evidence on the impact of automatic 

enrollment. 

Page 10 GAO-09-642 Private Pensions
 

Table 3: Key Factors Affecting Accumulation of Benefits in Common DB and DC 

Plans 

DB plan—final average pay DC plan—401(k) 

Coverage Voluntary for employers to 

sponsor a plan; all eligible 

workers generally participate in 

the plan 

Voluntary for employers to 

sponsor a plan; voluntary for 

workers to participate 

Contributions Generally financed by the 

employer 

Worker and/or employer may 

provide contributions 

Investment Assets are centrally managed; 

investment risk is borne by the 

employer; benefits are insured up 

to certain limits by the Pension 

Benefit Guaranty Corporation 

Assets are generally self-directed 

by the worker (among options 

made available by the plan); 

investment risk is borne by the 

worker; benefits are not insured 

by the Pension Benefit Guaranty 

Corporation 

Source: GAO analysis. 

Workers may also fail to accumulate sufficient pension benefits due to 

inadequate contributions. As a result of the transition to DC plans, 

workers increasingly bear the responsibility for making contributions to 

their plans. In a DB plan, contributions are generally financed exclusively 

by the employer and benefits are determined by a formula based on years 

of service and earnings. However, in a DC plan, contributions can be made 

by the worker, employer, or both, and the amount of the benefit depends 

on the amount of contributions made and net investment returns. 

Estimates vary for a target contribution rate to achieve adequate 

retirement income from a DC plan. Pension experts we interviewed cited 

target contribution rates of between 12 and 20 percent of pay. Research 

suggests that contributions to DC plans for many workers are less. For 

example, according to a study by an investment management firm which 

manages a large number of DC plans, the majority of contributions are 

made by workers, not employers, and the median worker contribution in 

2007 was 6 percent among plans managed by this firm.21 Employers can 

make either matching or nonmatching contributions to a DC plan.22 The 

same study indicates that, among DC plans managed by this firm, most 

employers who sponsor DC plans provide matching contributions, with a 

Contributions 

 

21See “How America Saves 2008: A Report on Vanguard 2007 Defined Contribution Plan 

Data,” Vanguard Institutional Investor Group, 2008. 

22Employer-matching contributions are made only if a worker makes contributions to the 

plan, while a nonmatching contribution is made regardless of the worker’s contributions. 

Page 11 GAO-09-642 Private Pensions
 

median employer match of 3 percent in 2007. Since 2007, under 

deteriorating economic conditions, many employers have suspended or 

reduced their contributions to DC plans. In a DB plan, on the other hand, 

the employer bears the responsibility of making contributions and may 

decide to terminate or freeze the plan to lessen the need to make future 

contributions, which also would reduce the amount of pension benefits a 

worker accumulates for retirement. Moreover, several experts we 

interviewed said that it is important to combine automatic enrollment in 

DC plans with automatic escalation of contributions. Without automatic 

escalation of contribution rates, automatic enrollment may lead to 

insufficient retirement income because employers may set a low default 

contribution rate for workers, such as 3 percent or less, and many workers 

who participate remain at the default level. 

Workers face additional risks related to investment returns and asset 

allocation decisions in accumulating pension benefits. In a DC plan, the 

employer must provide participants with a range of investment options. 

Workers are responsible for allocating their funds among those options 

and individually bear the investment risks. If investments do not perform 

as well as expected, workers will have less money in their DC plans to 

provide income in retirement. In a DB plan, on the other hand, employers 

are responsible for making investment decisions and bear the investment 

risks. Several experts we interviewed said workers who participate in a 

DC plan may make poor investment decisions. For example, standard 

financial theory recommends that workers shift their investments from 

riskier assets, such as stocks, to more stable assets, such as bonds, as they 

near retirement. However, research shows that many older workers still 

have high stock allocations. For example, one study shows that nearly 1 in 

4 individuals between the ages of 56 and 64 had more than 90 percent of 

their 401(k) account balance invested in stocks at the end of 2007.23 A 

sharp drop in the stock market, such as the 37 percent fall in the S&P 500 

in 2008, is of particular concern for older workers heavily invested in 

stocks because they may lack enough years before retirement to recoup 

their losses. Overall, from October 2007 to October 2008, the value of 

stocks held in 401(k)s and IRAs reportedly fell by about $2 trillion.24 In 

Investment 

 

23Jack VanDerhei, “The Impact of the Recent Financial Crisis on 401(k) Account Balances,” 

Employee Benefit Research Institute, Issue Brief, no. 326 (Washington, D.C., February 

2009). 

24Alicia Munnell, Francesca Golub-Sass, and Dan Muldoon, “An Update on 401(k) Plans: 

Insights from the 2007 SCF,” Center for Retirement Research at Boston College (March 

2009). 

Page 12 GAO-09-642 Private Pensions
 

addition, several experts we interviewed noted that DC participants may 

also increase their exposure by investing in employer stock. Investing in 

employer stock poses additional risk because if the employer does not 

perform well, the value of the employer’s stock may fall and layoffs ensue. 

Thus, workers may lose their jobs at the same time the value of their 

pension benefit declines. One study by an investment management firm, 

which manages a large number of DC plans, found that in 2006, 59 percent 

of DC participants were in plans that allow investment in employer stock.25

Among these plans, 21 percent of participants’ total assets were invested 

in employer stock. In addition, two experts we interviewed said that DB 

plans invest more successfully than some workers in DC plans because 

they are professionally managed. However, DB plans are not immune from 

declining investment returns. For example, declining investment returns 

can reduce a plan’s funding level, requiring additional contributions from 

the employer. At the same time, poor economic conditions may make it 

financially difficult for the employer to make those contributions and 

could ultimately cause the employer to terminate or freeze their plan. In 

the event that an employer terminates a DB plan with insufficient assets to 

pay workers the pension benefit they are entitled to, a federal insurance 

program administered by the Pension Benefit Guaranty Corporation 

provides protection up to certain limits for qualified plans.26 Nevertheless, 

in a DB plan, low investment returns do not directly lower a worker’s 

benefits. 

 

25See “Building Futures VIII: A Report on Corporate Defined Contribution Plans,” Fidelity 

Investments, 2007. 

26The pension benefit that the Pension Benefit Guaranty Corporation (PBGC) pays to a 

participant whose single-employer plan has been terminated depends on (1) plan 

provisions, (2) statutory limits on PBGC benefit payments, (3) the type of benefit the 

participant is entitled to receive, (4) the participant’s age, and (5) amounts of assets that 

PBGC recovers from employers whose plans they have taken over. 

Page 13 GAO-09-642 Private Pensions
 

Workers also face risks in preserving their pension benefits for retirement. 

The amount of pension benefits may be reduced due to a lack of 

portability when workers change jobs, particularly in DB plans, and 

preretirement benefit withdrawals (i.e., leakage), particularly in DC 

plans.27 In addition, workers with DC plans may have the value of their 

benefits eroded by high fees, which reduce net investment returns. 

Moreover, workers face several risks when drawing down their benefits 

during retirement, including whether their benefits last a lifetime, how 

well their investments perform, and how their savings weather inflation. 

The pension benefits available for retirement may be lower for workers 

who change jobs if pension benefits are not fully portable. Specifically, 

risks arise in final pay DB plans because workers changing jobs may incur 

future lifetime benefit losses in that their benefits would be lower 

compared to the benefits they would have accrued by remaining with their 

current employer until retirement.28 As the example in the box below 

illustrates, when a worker with a final pay DB plan changes jobs, she may 

lose credit for past service that will reduce the amount of her annual 

pension benefit in retirement. 

Workers Face Risks 

Preserving Pension 

Benefits Related to 

Portability, Leakage, Fees, 

and the Drawdown of 

Benefits in Retirement 

Portability

 

27Preretirement benefit withdrawals include loans or hardship withdrawals. In addition, 

workers can decide to take an early distribution subject to taxes and a 10 percent penalty 

when changing employers. 

28The term “portability” is also sometimes used to refer to the ability of plan participants to 

transfer accrued benefits from one plan to another, for example, in the case of DC plans 

and career average DB plans. 

Page 14 GAO-09-642 Private Pensions
 

The Impact of Changing Jobs in a Final Average Pay DB Plan 

In a DB plan with a formula based on final average pay, a worker who changes jobs and 

DB plans can accrue lower benefits compared to a worker who stays in the same plan. 

For example, a final average pay formula might determine monthly benefits payable at 

retirement on the basis of 1.25 percent multiplied by years of service completed 

multiplied by the worker’s average salary over the last 5 years of service. Compared to a 

worker who stays in the same plan for a 25-year period, a worker who changes plans 

part-way through her 25-year career accrues a lower benefit. 

Scenario 1: A worker is in the same DB plan for 25 years 

1.25% x 25 years of service x $65,000 (average of employee’s final 5 years’ 

annual salaries) = $20,313 

Annual benefit from DB plan = $20,313 

Scenario 2: A worker is in two identical DB plans for 25 years, with a job change after 

15 years 

1.25% x 15 years of service x $35,000 (average of employee’s final 5 years’ 

annual salaries) = $6,563

1.25% x 10 years of service x $65,000 (average of employee’s final five 

years’ annual salaries) = $8,125

Annual benefit from both DB plans = $14,688 

Note: In scenario two we assume that the worker is always covered by an identical plan that has the 

same features as the worker’s current plan. The worker loses no benefits because she has met the 

plans’ vesting requirements. 

Table 4: Key Factors That Affect the Preservation of Benefits in Common DB and 

DC Plans 

DB plan—final average pay DC plan—401(k) 

Portability Worker is entitled to vested 

benefits; the benefits and service 

credits generally are not 

transferable if the worker changes 

jobs and are not adjusted for 

inflation 

Worker is entitled to vested 

benefits; the account balance may 

be transferred if the worker changes 

jobs 

Leakage Early access to benefits may be 

permitted in some cases 

Plan may allow workers to take a 

loan or hardship withdrawal prior to 

retirement. In addition, workers may 

take an early distribution when 

separating from their employer and 

not roll it over into another plan or 

IRA. Early distributions that are not 

rolled over are generally subject to 

a 10 percent excise tax and regular 

income tax. 

Page 15 GAO-09-642 Private Pensions
 

DB plan—final average pay DC plan—401(k) 

Fees Administrative and investment fees 

are paid by the employer 

Investment fees are usually paid by 

workers; administrative fees are 

often paid by employers, but 

workers bear them in a growing 

number of plans 

Drawdown Workers who receive lump-sum 

distributions must decide how to 

withdraw their benefitsa

Workers decide how to withdraw 

their lump-sum benefitb

Source: GAO analysis. 

a

In most traditional final average pay plans, benefits are typically distributed as annuities and are not 

adjusted for inflation. 

b

Most DC plans do not offer an annuity option. 

Several forms of preretirement benefit leakage can also reduce the income 

workers receive from pension benefits in retirement. For example, in a DC 

plan, workers may be able to access their account prior to retirement by 

taking a loan or hardship withdrawal, or requesting a lump-sum 

distribution when leaving a job (i.e., “cashout”).29 Over the long term, early 

withdrawals of retirement savings can adversely affect a worker’s 

preparedness for retirement, especially when withdrawn funds are 

consumed and not replaced. Several experts we interviewed cited 

cashouts, in particular, as a significant form of leakage that can pose risks 

to workers’ retirement security. Workers with a DC plan may cash out 

their account balances when separating from an employer by requesting a 

lump-sum payment of their total account balance, or some portion of it, 

rather than keeping their accumulated savings in the plan or rolling it into 

another DC plan or IRA.30 If the worker chooses to receive their account 

Leakage 

 

29Plans may permit participants to take a general purpose loan for up to 50 percent of their 

vested account balance, or $50,000, whichever is less, without those amounts being 

considered distributions from the plan. 26 U.S.C. § 72(p). Participants generally must repay 

loans with interest within 5 years unless the loan is used to purchase a primary home and 

the plan permits a longer repayment period. Plans may also allow participants to take 

hardship withdrawals in amounts not exceeding the participant’s own 401(k) contributions 

upon demonstrating an immediate and heavy financial need, which the Internal Revenue 

Service has defined as including nonreimbursed medical expenses; costs relating to the 

purchase of a principal residence; postsecondary tuition and related educational fees and 

expenses; payments necessary to prevent eviction from, or foreclosure on, a principal 

residence; burial or funeral expenses; or expenses for the repair of damage to a principal 

residence. 26 C.F.R. § 1.401(k)-1(d)(3) (2008). 

30Plans may also issue involuntary cashouts to separating workers whose account balances 

are worth no more than $5,000. If the plan issues a cashout and the account balance is 

worth more than $1,000 but less than $5,000, the distribution is automatically rolled over 

into an IRA unless the worker elects otherwise. 

Page 16 GAO-09-642 Private Pensions
 

balance as a cashout, the distribution is generally subject to income taxes 

and a 10 percent excise tax.31 According to a study by an investment 

management firm which manages a large number of DC plans, about 28 

percent of workers leaving their employer in 2007 took their distribution 

as a cashout and another 2 percent split their distribution between saving 

and a cashout rather than preserving it for retirement.32 Workers with a DB 

plan may in some cases be allowed to gain access to their benefits prior to 

retirement. For example, some DB plans may provide a lump-sum 

distribution when workers leave their jobs.33 Similar to a DC plan, if this 

distribution is not rolled into a new employer’s plan or IRA, the amount of 

benefits available for retirement may be reduced.34

In addition, the pension benefits available for retirement can be eroded by 

high administrative and investment fees. While fees are paid by the 

employer in a DB plan, workers often bear the cost in a DC plan.35 Over 

the course of a worker’s career, fees may significantly decrease retireme

savings by lowering the net investment returns. For example, a 1 

percentage point difference in fees can substantially reduce the amount of 

money saved for retirement (see fig. 2). Investment fees, which are 

charged by companies managing mutual funds and other investment 

products for services provided in operating the fund, comprise the 

majority of fees in 401(k) plans and are typically borne by workers. 

Administrative fees, which cover the cost of various administrative 

activities carried out to maintain participant accounts, generally account 

for the next largest portion of plan fees. Although employers often pay the 

administrative fees, workers bear them in a growing number of plans. 

Several experts we interviewed also said it is difficult for workers to 

understand the amount and impact of fees on their DC plans. As we 

reported in 2007, the fee information employers are required to disclose is 

Administrative and 

Investment Fees 

nt 

 

3126 U.S.C. § 72(t). 

32See “How America Saves 2008: A Report on Vanguard 2007 Defined Contribution Plan 

Data,” Vanguard Institutional Investor Group, 2008. 

33Workers may also be able to take a lump-sum distribution in case of disability. 

34A forthcoming GAO report will provide more information on the incidence of leakage. 

35For more information on fees in 401(k) plans, see GAO, Private Pensions: 401(k) Plan 

Participants and Sponsors Need Better Information on Fees, GAO-08-95T (Washington, 

D.C.: Oct. 24, 2007) and Private Pensions: Changes Needed to Provide 401(k) Plan 

Participants and the Department of Labor Better Information on Fees, GAO-07-21 

(Washington, D.C.: Nov.16, 2006). A forthcoming GAO report will examine fees in other DC 

plans, such as 403(b) plans and 457 plans. 

Page 17 GAO-09-642 Private Pensions
 

limited and does not provide workers with easy comparisons between fees 

charged for different investment options. 

Figure 2: Effect of a 1 Percentage Point Higher Annual Fee on a $20,000 401(k) 

Balance Invested over 20 years 

0

20,000

40,000

60,000

80,000

1 5 10 15 20

Account balance

Source: GAO analysis.

Years

Accumulated account balance with .5 percent charge for fees

Accumulated account balance with 1.5 percent charge for fees

Once they retire, employers distribute retirement benefits to eligible 

participants according to the provisions of the plan. In DB plans, 

employers typically distribute benefits as an annuity, although lump-sum 

distributions may be allowed. In DC plans employers typically distribute 

benefits as a lump sum, and DC plans generally do not offer an annuity 

payout option. Workers that receive lump-sum distributions, in particular, 

face several risks related to how they withdraw, or “draw down” their 

benefits, including: 

Drawdown of Benefits during 

Retirement 

• Longevity risk—retirees may drawdown benefits too quickly and outlive 

their assets. Conversely, retirees may drawdown their benefits too slowly, 

unnecessarily reduce their consumption, and leave more wealth than 

intended when they die. 

Page 18 GAO-09-642 Private Pensions
 

• Investment risk—assets in which pension savings are invested may decline 

in value. 

• Inflation risk—inflation may diminish the purchasing power of a retiree’s 

pension benefits. 

As noted above, the extent to which retirees face these risks depends on 

how their benefits are distributed in retirement. For example, pension 

benefits may be distributed as a lump-sum and invested in assets that can 

be gradually drawn down over the course of retirement. In this case, 

retirees must decide how to invest their assets and face the risk that their 

investments will decline in value—investment risk—and thus not provide 

sufficient income. In addition, retirees may live longer than expected—

longevity risk—and exhaust their account balances. If, instead, retirees die 

earlier than expected, they may leave much of their benefit unspent. 

Alternatively, benefits could be received in the form of an annuity—a 

series of monthly payments for the remainder of a retiree’s life. An annuity 

mitigates the risk that retirees will outlive their assets. However, if the 

annuity is not adjusted for inflation, retirees still face the risk that 

purchasing power will be eroded if inflation rises—inflation risk. 

In DC plans, the pension benefit is available as a lump-sum and retirees 

must decide how to draw down their account to finance retirement, for 

example through gradual withdrawals or by purchasing an annuity in 

which set payments are generally made for the rest of the retirees’ lives. 

However, annuities are generally not offered as an option in DC plans. 

According to one study, estimates suggest that about one-fifth or less of 

DC plans offer an annuity option.36 While retirees could purchase an 

annuity on the private market, several experts we interviewed indicated 

that one of the reasons this option is not widely used is that it is more 

expensive when purchased by individuals than by a group. DB plans, on 

the other hand, provide group access and are legally required to offer a 

benefit payout in the form of an annuity. However, most DB plans do not 

adjust benefit payments for inflation, so a retiree still faces the risk that 

their purchasing power will erode if inflation rises. While DB plans are 

required to offer benefits in the form of an annuity, many DB plans also 

offer workers the option of taking benefits as a lump-sum. One study 

 

36John A. Ameriks et. al., “Immediate Income Annuities and Defined Contribution Plans,” 

Vanguard Center for Retirement Research, vol. 32, May 2008. 

Page 19 GAO-09-642 Private Pensions
 

found that when offered a lump-sum distribution the majority of DB 

participants chose this option over an annuity.37

The private pension systems in the Netherlands, Switzerland, and the 

United Kingdom provide alternative approaches to address the primary 

risks faced by U.S. workers, although there are important trade-offs to 

consider in applying these approaches in the United States.38 These 

countries’ systems offer ideas for mitigating risks in accumulating or 

preserving benefits, such as using mandates to increase coverage, 

facilitating portability, and the widespread use of annuities to drawdown 

benefits (see table 5). In addition, the Netherlands’ and Switzerland’s 

systems spread investment and longevity risks amongst workers and 

retirees as a group so that no single individual risks losing a significant 

portion of their benefits or outliving their resources. In taking steps to 

reduce risks for workers, however, these countries’ private pension 

systems also pose trade-offs. For example, the United Kingdom’s recent 

reform plan requiring employers to automatically enroll workers in and 

contribute to pension plans will increase costs for some employers and 

workers. Further information about each country’s private pension system 

is provided in appendix II. 

Other Countries’ 

Experiences Offer 

Alternative 

Approaches for 

Addressing Risks 

Faced by U.S. 

Workers but also 

Involve Trade-offs 

Table 5: Private Pension Systems in the Netherlands, Switzerland, and the United Kingdom 

Netherlands Switzerland United Kingdom 

Predominant plan type DB (career average) DB (cash balance) DC (Personal Accounts)c

Key features 

Accumulation Mandatory for most 

employers and workersa

 

Mandatory Mandatory access with 

automatic enrollment 

Coverage 

(% of workforce covered) 

>90% >90% 75% (projected)d 

Contributions 

(% of a worker’s total 

salary) 

Employers – 7% - 19% 

Workers – 3% - 8% 

Employers – 3.5% - 9% 

Workers – 3.5% - 9% 

Employers – 3% 

Workers – 4% 

Government – 1% 

 

37John A. Ameriks et. al., “Immediate Income Annuities and Defined Contribution Plans,” 

Vanguard Center for Retirement Research, vol. 32, May 2008. 

38In this section, we focus exclusively on employer-based private pension systems; 

however, all three countries also have a public pension system, similar to the U.S. Social 

Security system. In all three countries, private pension income is considered 

supplementary to public pension income. 

Page 20 GAO-09-642 Private Pensions
 

Netherlands Switzerland United Kingdom 

Predominant plan type DB (career average) DB (cash balance) DC (Personal Accounts)c

Key features 

Investment Assets pooled into 

pension funds managed 

by boards with employer 

and worker 

representation 

Assets pooled into 

pension funds managed 

by boards with employer 

and worker 

representation 

Individually managed by 

workers 

Workers’ benefit accruals 

and retirees’ benefits in 

payment indexed 

(adjusted in line with 

price/wage growth) 

conditional on fund’s 

financial solvency 

Guaranteed minimum 2% 

rate of return;b

retirees’ benefits in 

payment indexed 

(adjusted in line with 

price/wage growth) 

conditional on fund’s 

financial solvency 

Limited fund options, 

default investment 

allocation 

Preservation Portability Full Full Full 

Leakage Not allowed Allowed for specific 

reasons 

Not allowed 

Fees No explicit limit; 

vary 

No explicit limit; 

vary 

Target of 0.5% of plan 

assets 

Mandatory annuitization 

except for small account 

balances 

Most pension funds 

provide annuities 

Mandatory annuitization 

except for small account 

balances 

Drawdown of benefits 

Minimum 25% lump-sum 

option must be offered 

Maximum 25% lump-sum 

allowed 

Source: Discussions with officials in the Netherlands, Switzerland, and the United Kingdom, and examination of materials about 

employer-sponsored plans in those countries. 

a

Officials in the Netherlands told us there is no statutory obligation for employers to offer a pension 

plan but the government has mandated pension coverage in most industries at the request of 

employer and employee representatives. 

b

Officials in Switzerland told us this rate has decreased gradually over time from a high of 4 percent in 

1998-2002 due to lower market investment returns. 

c

Officials in the United Kingdom are currently developing some of the details for the new Personal 

Accounts system, scheduled to go into effect in 2012. 

d

75 percent coverage rate represents the total percentage of private pension coverage, according to 

officials. Officials expect that Personal Accounts, once fully implemented, will cover about 30 percent 

to 40 percent of the workforce. 

Some Level of Mandate Is 

Effective in Achieving 

Increased Rates of 

Coverage or Contributions 

Private pension systems in the Netherlands, Switzerland, and the United 

Kingdom demonstrate that different types of mandatory approaches can 

be used to increase coverage or contributions. 

Page 21 GAO-09-642 Private Pensions
 

The Netherlands and Switzerland use different forms of a mandate that 

result in nearly universal coverage. In the Netherlands, officials told us 

that even though there is no statutory requirement for all employers to 

offer a pension plan, private pension coverage is mandatory for many 

employers and workers at the industry level. For participation in an 

industry-wide pension plan to be declared mandatory, employer and 

worker organizations, as social partners, must petition the government to 

extend a mandate.39 As a result, employers and all eligible workers in most 

industries are required to participate in a pension plan. Over 90 percent of 

workers are covered and participate in a plan. Employers generally offer 

one of three types of plans: industry-wide plans, single company plans, and 

plans for specific professional groups, such as doctors; however, 

employers also can decide to sponsor a plan through an insurance 

company. 

Coverage 

Switzerland has a mandatory private pension system that covers over 90 

percent of eligible workers.40 Officials told us that by law, Swiss employers 

are required to provide pension coverage for workers earning over a 

minimum threshold of income.41 Workers may be covered in single 

company plans, multiemployer plans, or industry-wide pension plans, or 

employers can decide to sponsor a plan through an insurance company. A 

special default pension fund exists for employers who do not offer a 

specific pension plan.42 Several officials we interviewed in Switzerland 

 

39About 75 percent of industry-wide pension plans are mandatory and these industry plans 

cover about 67 percent of the workforce. The employer and worker groups making the 

request must represent at least 60 percent of the workers in that industry. A company 

offering a more generous plan can be exempt from joining the industry-wide plan. 

40The Federal Law on Retirement, Survivors’ and Disability Pension Plans was implemented 

in 1985 and specified a mandatory employer-based pension system. Officials said the 

majority of plans in Switzerland are hybrid plans. These hybrid plans are similar to cash 

balance plans, which in the United States are legally classified as DB plans because 

participants’ benefits are determined by a benefit formula. However, a cash balance plan 

has certain features, such as hypothetical “individual accounts,” that make it resemble a DC 

plan. 

41Officials in Switzerland told us that participation in the private pension system is 

mandatory for workers age 25 and older earning above 20,520 Swiss Francs (about $19,000 

as of June 2009). Workers earning below this level of income are covered by the public 

pension plan as are all Swiss workers. 

42The default pension fund operates similarly to most company or industry pension funds 

as a foundation independent of employers and run on a nonprofit basis. This fund also 

covers employees working for several employers, the self-employed, citizens living abroad, 

and people no longer covered by the mandatory private pension system but wishing to 

keep their accounts. 

Page 22 GAO-09-642 Private Pensions
 

said that mandatory coverage is a key strength of the Swiss private 

pension system. Before Switzerland implemented a mandatory private 

pension system in 1985, officials told us that only about 50 percent of 

workers were covered. 

 

The United Kingdom is in the process of introducing an auto-enrollment 

policy into its voluntary private pension system to increase pension 

coverage. According to officials in the U.K., the Pension Act of 2008 

mandates U.K. employers to automatically enroll all eligible workers into a 

qualified employer-sponsored plan starting in 2012 or the new system of 

DC accounts called “Personal Accounts” that was established by statute 

and will be run by a nonprofit trustee corporation.43 While some of the 

details of the Personal Accounts plan are still being developed, U.K. 

officials told us that employers sponsoring their own pension plans will be 

exempt from auto-enrolling employees into Personal Accounts provided 

they operate a plan of equal or better value.44 Workers have the choice to 

opt out of the plan, thus their participation is voluntary. The United 

Kingdom’s goal is to increase coverage, especially among low- and middleincome income workers. Officials said they expect about 70 percent to 90 

percent of those automatically enrolled will not opt out which could 

increase the total private pension coverage from 33 percent to over 75 

percent under this policy. Most officials and organizations we interviewed 

in the United Kingdom said that mandating auto-enrollment but allowing 

workers to opt out is a key feature that will increase coverage, and two 

officials said that requiring auto-enrollment is a constructive compromise 

because it directs individual inertia toward enrollment while preserving 

individual choice. Government officials said the previous reforms were 

largely unsuccessful at increasing total coverage because they provided 

access but relied on workers to actively enroll. The “Stakeholder 

Pensions” introduced in 2001 as a reform to the pension system were 

similar to the new Personal Accounts plans in that they were DC accountbased plans; however, they did not significantly increase coverage because 

they required workers to make an active decision to participate in the 

Private Pension Plan Governance

Laws in the Netherlands and Switzerland 

require private pension funds to be managed 

by independent entities with no legal or 

financial link to the sponsoring employers. 

This helps mitigate the risk that a pension 

fund will become insolvent if the employer 

goes bankrupt. Most pension funds in the 

Netherlands and Switzerland are non-profit 

entities with their own governing boards that 

have equal representation of employers and 

employees. Similarly, in the United Kingdom, 

the Personal Accounts plans will be 

administered on a nonprofit basis by a

Trustee Corporation, with advisory panels

comprised of employers and employees. In 

all three systems, this allows for shared input 

on key decisions, such as asset management 

in the Swiss and Dutch DB plans. In contrast, 

most private pension plans in the United 

States are not financially and legally 

independent from the sponsoring employer. 

In most DC plans, the sponsoring employer is

responsible for administering the plan, 

including selecting and monitoring investment 

options offered to plan participants. In 

addition, most DB pension fund assets in the 

United States are financially linked to the 

sponsoring employer’s company balance 

sheet as the pension funds are considered a

part of the sponsoring employer’s assets and 

liabilities. 

43Officials in the United Kingdom told us that eligible workers are those between the ages 

of 22 and the retirement age, currently 65, with earnings over the annual minimum pay 

threshold of £5,035 or about $8,000, as of June 2009. 

44A qualified pension plan can be a DC or DB plan, or a combination of both. Qualified DC 

plans are those to which the employer contributes at the same level as required for 

Personal Accounts. Qualified DB plans are those that meet the current exemption 

requirements for the State Second Pension; overall, the DB plan must offer equivalent or 

better benefits. 

Page 23 GAO-09-642 Private Pensions
 

plan, rather than use automatic enrollment. A limitation to auto-enrollment 

is that some workers may still choose to opt out and coverage may not 

increase as much as anticipated. To address this concern, employers will 

be required to automatically re-enroll workers every 3 years so that 

workers will be able to reconsider their decision periodically and will have 

to affirmatively decide to leave the plan. 

Each country’s pension system requires contributions by both employers 

and workers to increase retirement savings (see table 6). 

Contributions 

Table 6: Total and Distribution of Contributions to Private Pension Plans in the United Kingdom, the Netherlands, and 

Switzerland, 2009 

United Kingdoma

Netherlands Switzerland 

Employer 38% of contributions 

(3% of salary) 

66% - 75% of contributions 

(7% - 19% of salary) 

>50 % of contributions 

(3.5% - 9% of salary) 

Worker 50% of contributions 

(4% of salary) 

25%-33% of contributions 

(3% - 8% of salary) 

<50 % of contributions 

(3.5% - 9% salary) 

Government 13% of contributions 

(1% of salary) 

None None 

Total percentage of salary 8% 

(minimum required by law) 

10% - 25 % 

(negotiated between employers 

and unions) 

7% - 18 %b

(minimum required by law) 

Total preretirement income 

replacement goal (public and 

private pension income 

combined) 

45% 

(projected) 

70% 60% 

Source: Discussions with officials in the Netherlands, Switzerland, and the United Kingdom, and examination of materials about 

employer-sponsored plans in those countries. 

a

Figures for the United Kingdom are for the new Personal Accounts plans, which are currently under 

development and scheduled to go into effect in 2012. 

b

In Switzerland, the amount of the required contribution amounts increase with age. 

Officials in Switzerland told us that Swiss federal law sets minimum 

contributions for employers and workers, requiring employers to pay at 

least half of the total of contributions. Mandatory minimum total 

contributions in Switzerland increase with age.45 Officials in Switzerland 

also told us that many employers contribute more than the required 

 

45Minimum total contributions change by age according to the following formula: 7 percent 

of qualified earnings from age 25 to 34; 10 percent from age 35 to 44; 15 percent from age 45 

to 54; and 18 percent from age 55 to 65. 

Page 24 GAO-09-642 Private Pensions
 

minimum.46 Under recent reforms, the United Kingdom is also using a 

mandatory approach to minimum contributions. Officials in the United 

Kingdom told us that mandatory minimum contributions are required from 

employers and workers participating in an employer-sponsored or 

Personal Accounts plan. Officials also said they expect the minimum 

required employer contributions to be phased in gradually, starting at 1 

percent of earnings in 2012, 2 percent of earnings in the second phase, and 

3 percent of earnings upon final implementation.47 Also, officials said that 

the contribution structure is based on the principle of sharing 

responsibility among all stakeholders, and that the government and 

employer contributions were designed to provide an incentive for workers 

to participate. Government officials in the United Kingdom said that 

mandating minimum employer and worker contributions in the recent 

reforms is particularly important for increasing total retirement savings. 

Officials said one of the reasons the previously introduced Stakeholder 

Pensions failed to increase retirement savings was because contributions 

were not mandated and many accounts had low balances. However, one 

insurance company official said that there is some concern among 

employers about mandating minimum contributions through automatic 

enrollment because it will likely increase the total costs of their pension 

plans as more workers participate and require employer contributions. 

Officials told us that they are considering ways to mitigate the impact of 

this mandate on the smallest employers. 

Officials in the Netherlands told us while minimum contributions are not 

mandated in the Netherlands, labor contracts negotiated between 

employer and worker representatives specify required contribution levels 

for employers and workers in most companies or industries.48 Officials 

also said that this process of negotiation is a key strength of the system 

because it leaves the decision making up to the directly affected parties. 

As a result, worker and employer contributions in the Netherlands vary 

across companies and industries. Pension fund boards can sometimes 

 

46Officials in Switzerland said that earnings subject to mandatory contributions are those 

between 20,520 Swiss Francs and 82,080 Swiss Francs (about $19,000- $77,000 as of June 

2009) with an offset or deduction tied to the public pension. 

47U.K. officials said that earnings subject to contributions are those between £5,035 and 

£33,540 (about $8,000 to $54,000 as of June 2009). 

48Officials in the Netherlands said that earnings subject to contributions in the Netherlands 

are gross earnings minus an offset or deduction tied to the flat public pension. The majority 

of private pension plans in the Netherlands are career-average DB plans, although 

participants also can make contributions. 

Page 25 GAO-09-642 Private Pensions
 

request an increase in both worker and employer contributions to make up 

funding shortfalls in the pension plan. However, several officials said that 

in recent years, a few DB plans have been converted to collective DC 

(CDC) plans in which employers’ contribution levels are fixed, even when 

there is a funding shortfall.49 Officials said that while fixing employer 

contributions in CDC plans shifts some of the investment risk within 

pension funds to the workers, employers prefer this structure because 

their costs become more predictable.50

While mandating contributions can help workers accumulate sufficient 

pension benefits, it also can pose some challenges. For example, it could 

become the norm for workers and employers to make the minimum 

contributions and even encourage some that currently contribute to a 

pension plan at a higher rate to switch to lower contributions at the 

required minimum level, thus increasing the risk of inadequate retirement 

savings. U.K. officials said it will be a challenge to convey to the public 

that the employer and worker contribution rates that will be required in 

Personal Accounts are a minimum level of commitment rather than a 

target. Experts said that some employers currently offering pension plans 

in the United Kingdom may decrease their contributions to the minimum 

requirement, which is expected to be 3 percent of pay after they are fully 

phased in. Officials said that the government plans to address this problem 

by giving certain incentives to employers that have higher-than-minimum 

contribution rates, such as granting extensions on the deadline for 

automatically enrolling workers. In addition, GAO has previously found 

that lower-income workers face competing income demands for basic 

necessities, thus requiring mandatory minimum contributions could 

adversely affect lower-income workers who may find it difficult to 

contribute due to financial constraints. To address this concern, officials 

in the United Kingdom and Switzerland told us they have established 

 

49A “collective defined contribution” plan in the Netherlands is not a DC plan as commonly 

understood in the U.S. context. Rather, it is similar to a career-average DB plan, except 

employer contributions are fixed for a set period of time, generally 5 years, while workers’ 

contributions can be adjusted based on the solvency of the plan. 

50Officials told us that recent changes in accounting standards provide an incentive for 

employers to offer a CDC plan. Because pension funds must use market values to calculate 

assets and liabilities, employers are becoming less willing to vary their contributions and 

prefer the fixed contribution schedule of CDC plans. 

Page 26 GAO-09-642 Private Pensions
 

minimum earnings thresholds under which low-income workers are 

excluded from participating.51

Indexation of Benefits and 

Guaranteeing Returns 

Mitigate Investment Risk 

for Individual Workers 

The pension systems in the Netherlands and Switzerland address 

investment risks faced by workers in various ways, such as pooling assets 

and guaranteeing rates of return. In the Netherlands and Switzerland, most 

private pension fund assets are pooled and managed by a pension fund 

board comprised of employer and worker representatives.52 Officials from 

the Netherlands and Switzerland said that investment risk and 

management responsibility of pension funds were shared by the social 

partners—employers and workers. Officials from the Netherlands and 

Switzerland said that the social partnership between employers and 

workers was a key feature of their systems, and officials from the 

Netherlands said that there has been a slower shift from DB plans to selfdirected DC plans than in other countries because of this partnership. 

Officials from Switzerland said that structuring assets collectively through 

a pension fund was more important in their system than maintaining 

individual control over assets, highlighting a key trade-off of investment 

features in private pension plans. In addition, officials told us that the 

governments in the Netherlands and Switzerland impose restrictions on 

pension fund boards’ asset management in DB plans to protect workers 

against investment risks. For example, officials said that pension funds in 

Switzerland are limited to investing no more than 50 percent of total assets 

in equities, no more than 30 percent in foreign currencies, and no more 

than 5 percent in the sponsoring employer. 

In the Netherlands, most DB pension plans share investment gains by 

periodically adjusting the value of workers’ benefits, a process known as 

 

51In the United Kingdom, officials said the minimum annual earnings threshold is £5,035 or 

about $8,000, as of June 2009. In Switzerland, officials said the private pension system is 

mandatory for workers earning above 20,520 Swiss Francs or about $19,000, as of June 

2009. 

52The majority of private pension plans in the Netherlands are career-average DB plans, 

although participants also make contributions, unlike in most U.S. DB plans. Officials said 

the majority of plans in Switzerland are hybrid plans. These hybrid plans are similar to cash 

balance plans, which in the United States are legally classified as DB plans because 

participants’ benefits are determined by a benefit formula. However, a cash-balance plan 

has certain features, such as hypothetical “individual accounts,” and contributions made by 

workers, that make it resemble a DC plan. 

Page 27 GAO-09-642 Private Pensions
 

“indexation.”53 According to officials, pension boards usually adjust 

workers’ and also retirees’ benefits conditional on the pension fund’s 

overall funding level.54 According to officials, if the plan’s funding ratio is 

above the established benchmark, benefits are indexed to reflect the 

growth in wages or prices. However, if the plan’s funding ratio is below the 

established benchmark benefits may only be partially indexed or not 

indexed at all.55 Labor contracts between employers and workers in the 

Netherlands specify exactly how indexation is to be determined. The 

process of indexation allows pension funds to spread investment gains or 

losses to all participants in the pension fund—active workers, those who 

have left the employer but keep their accrued benefits in the fund, as well 

as retirees—by either applying or not applying adjustments to accrued 

benefits and pensions. Officials in the Netherlands said that sharing 

investment risk by indexing accrued benefits conditional on the plan’s 

funding ratio helps protect workers from individually bearing investment 

risk. While this approach reduces individual investment risk, according to 

experts, the recent decline in investment returns caused by the financial 

crisis has prevented full indexation in many pension funds in the 

Netherlands and may lead to lower-than-expected benefits, especially for 

those close to retirement. Recent data from the Central Bank of the 

Netherlands shows that the average funding ratio of pension funds in the 

Netherlands at the end of 2008 was 95 percent, which is below the 

minimum level required for indexation. Thus, in the near term, pension 

benefits for many workers and retirees will not be adjusted to account for 

the growth in wages or inflation. However, if funding levels recover 

sufficiently, pension boards may decide to grant “catch-up” indexation to 

compensate for indexation not granted or partially granted in past years. 

Officials in the Netherlands said catch-up adjustments were applied by 

many pension funds after the financial crisis in the early 2000s; however it 

 

53In this context, to “index” benefits means to adjust benefits in line with price or wage 

growth. For example, if retirees’ benefits were never adjusted for price increases, the 

purchasing power of those benefits would be eroded. 

54The funding level of a pension plan is largely determined by two factors—assets and 

liabilities. Investment returns impact assets and liabilities are affected by the interest rate 

used to compute them. According to officials, that interest rate is no longer fixed at 4 

percent, but changes with market conditions. Officials said that every month, the Central 

Bank publishes the interest rate that pension funds must use to calculate their liabilities. 

55Indexation policy is supervised by the Central Bank of the Netherlands. Specifically, if 

pension assets are above 130 percent of liabilities in a given year, accrued benefits are 

permitted to be fully indexed; if funding levels are between 130 percent and 105 percent, 

the pension fund may decide how to apply partial indexation; if the funding level is below 

105 percent, indexation is prohibited. 

Page 28 GAO-09-642 Private Pensions
 

is unclear when pension funds will have recovered sufficiently from the 

current economic downturn in order to make similar catch-up 

adjustments. Officials said that the Central Bank also requires that plans 

with a funding level below the minimum level required for indexation 

submit recovery plans detailing how they will restore funding levels, and 

currently government and pension funds are examining whether to extend 

the recovery period length in light of the recent turmoil in financial 

markets. 

Figure 3: Risk-sharing through Conditional Indexation of DB Pension Benefits in the Netherlands 

Sources: GAO analysis based on discussions with officials in the Netherlands; images, Art Explosion.

Pension fund

Central Bank of the 

Netherlands

Netherlands Ministry of Social 

Affairs and Employment

Funding ratio

Indexation of benefits

Contributions

Net investment

returns

Benefits

promised to 

participants

Pension board

Worker 

representatives

Employer 

representatives

Benefits may not be 

adjusted; pension funds must 

submit 3-year recovery plan 

for increasing funding ratio to 

105 percent

Benefits may be partially 

adjusted; pension funds

must submit 15-year 

recovery plan for increasing 

funding ratio to 130 percent

Benefits may be fully 

adjusted in line with 

price/wage growth

– Contribution levels

– Benefit accrual rate

– Conditions under 

 which benefits

 are indexed

Employment 

contract

Assets

Pension fund 

solvency

Impact on retirees’

benefits in payment

Impact on workers’

benefit accruals

supervises

indexation 

policy

sets legal regulations

for pension funds

including indexation 

policy

Liabilities

105%

130%

Recovery 

plans

Base

benefit

accrual

Partial

Full

Indexation

Indexation

Base

benefit

payment

Partial

Full

Page 29 GAO-09-642 Private Pensions
 

Alternatively, Switzerland mitigates investment risk faced by workers 

through a guaranteed minimum rate of return on accrued benefits. 

Officials told us that when the mandatory private pension system was 

implemented in 1985, the minimum rate of return was set at 4 percent.56

However, in 2003, the government began adjusting the rate to more 

accurately reflect market rates of return and since then it has been 

reduced to 2 percent. Several officials we spoke to in Switzerland said that 

many Swiss pension funds usually provide investment returns higher than 

the minimum rate set by the government when funding levels of the 

pension fund allow. Although this guarantee provides workers some 

certainty regarding benefits, ensuring that benefits will increase by the 

specified amount can be challenging for the pension funds and insurance 

companies responsible for providing the guarantee. For example, in order 

to avoid having shortfalls, pension funds have an incentive to invest in 

lower-risk assets that tend to pay lower returns, which may restrain 

investment gains that would otherwise be earned. Furthermore, experts 

and officials in Switzerland said that setting the guaranteed minimum rate 

can be difficult because stakeholders have different interests. For 

example, workers generally favor higher guaranteed rates while insurance 

companies favor lower rates. Setting the rate requires law-makers to 

consider the trade-offs for all stakeholders. Usually, the minimum 

guaranteed interest rate is reviewed by the government every year and is 

adjusted every other year. In light of the financial crisis, the new rate may 

be reviewed as early as next year, ahead of the normal schedule. 

Unlike the Netherlands and Switzerland, there has been a shift from DB to 

DC plans in the United Kingdom, thus more workers in the United 

Kingdom bear investment risk individually. U.K. officials are still 

discussing what types of investment options they will provide in the 

Personal Accounts plan. However, officials told us there will be a default 

investment option for workers that do not want to select their own 

investment allocations. Officials said the majority of workers enrolled into 

Personal Accounts plans are expected to remain with the default option 

and not actively choose how their particular assets are invested, so that 

the design of the default investment option will be an important part of the 

plan. 

 

56This is a nominal rate of return, not an inflation-adjusted or “real” rate of return. 

Page 30 GAO-09-642 Private Pensions
 

The private pension systems in the Netherlands, Switzerland, and the 

United Kingdom facilitate portability in various ways, allowing workers to 

preserve benefits when they change jobs or leave the workforce. In the 

Netherlands and Switzerland, where the vast majority of workers have DB 

plans, officials told us that accrued benefits are portable because workers 

have the legal right to transfer them when they change jobs, even if they 

change industries or types of plans.57 When a worker changes jobs in the 

Netherlands or Switzerland, the accrued benefits in the old plan are used 

to buy pension credits in the new plan. In the Netherlands, officials told us 

workers also can decide to leave their accrued benefits with the old 

pension fund; their benefits are then indexed in line with retiree benefits, 

conditional on the fund’s solvency. In Switzerland, officials said that if a 

worker does not transfer benefits to a new employer or leaves the 

workforce, benefits are transferred to a “portability institution fund,” an 

account provided by banks and life insurance companies, or a public 

default fund.58 According to officials, benefits are “parked” in these 

institutions until being transferred to another pension fund, for example 

when a worker takes a new job, and generally earn a minimum interest 

rate, which is usually lower than the guaranteed interest rate set for other 

pension plans, but protects workers’ benefits from being eroded by 

inflation. One trade-off to facilitating the portability of accrued DB 

benefits is that employers may lose a workforce management tool that 

allows them to regulate the size of their workforce in response to changing 

economic conditions. 

The Netherlands’, 

Switzerland’s, and the 

United Kingdom’s Pension 

Systems Facilitate Benefit 

Portability in the 

Workforce and Limit 

Preretirement Benefit 

Leakage 

In the United Kingdom, the Personal Accounts plan’s centralized structure 

will enable workers to maintain a single account throughout their career 

that each employer can contribute to and keeps accrued benefits in one 

location. In addition, officials said that preretirement benefit leakage in 

the forms of loans and hardship withdrawals will be prohibited. Further, 

transfers between plans will not be allowed with Personal Accounts prior 

 

57Officials told us that the right to transfer benefits is suspended in the Netherlands if one 

of the funds involved in the transfer (the giving or receiving fund) has a funding ratio under 

100 percent. The Central Bank of the Netherlands, which regulates the overall recovery 

process for insolvent pension funds, re-establishes the right of portability once the funding 

status of the pension fund recovers. In Switzerland, officials told us that the law of vesting 

rights guarantees workers the right to pension benefits, even if assets on the pension fund’s 

balance sheet do not cover the liabilities. The worker is entitled to the full accrued nominal 

retirement savings and can use it to buy into the new employer’s plan. 

58Officials in Switzerland told us if the worker does not designate a new employer’s fund 

within a window of time, between 6 months and 9 years after leaving the employer, his 

accrued benefits are automatically transferred into the portability institution fund. 

Page 31 GAO-09-642 Private Pensions
 

to drawing down benefits in retirement. As a result, workers will not be 

able to consolidate accounts until the age of 55 if they have a Personal 

Account and other employer accounts. Officials in the United Kingdom 

told us that the rule prohibiting transfers in and out of Personal Accounts 

was an important compromise for consensus building, particularly for the 

financial industry, as there was concern that workers may transfer funds 

out of existing plans into Personal Accounts plans. A trade-off to 

prohibiting transfers and consolidations, however, is that workers may 

have multiple accounts, which would be administratively more complex 

for both employers and workers to manage. 

The Netherlands and the United Kingdom prohibit early withdrawals, such 

as loans or hardship withdrawals, from private pension plan savings as a 

way to limit the risk of leakage of a worker’s retirement benefits, 

according to officials in those countries. A trade-off for restricting leakage 

is that it may deter workers from participating in a voluntary system or 

making contributions beyond the minimum requirements. For example, 

some workers may want the right of access to retirement funds in 

hardship situations. Unlike the Netherlands and the United Kingdom, 

officials told us workers in Switzerland are able to access their benefits 

prior to retirement in limited circumstances. For example, officials said 

that workers are able to cash out accrued benefits to purchase a home, 

start a business, or if they move outside the European Union. However, 

officials in Switzerland said that benefit leakage rarely occurs because the 

Swiss are particularly “conservative and cautious” when drawing from 

their pension fund assets. 

Page 32 GAO-09-642 Private Pensions
 

Pension plans in the Netherlands, Switzerland, and the United Kingdom 

commonly provide benefits in the form of annuities in retirement, limiting 

the risk that individuals may draw down their benefits too quickly and 

outlive their assets. In the Netherlands and Switzerland, pension funds 

typically provide the annuities directly, rather than facilitate purchases 

through insurance companies.59 In the Netherlands, officials said that 

limited lump-sum payments are allowed only when accrued benefits 

amount to very small annuity payments.60 In Switzerland, officials said that 

most people receive their pension benefits as a monthly annuity; however, 

pension funds must allow retirees to receive at least 25 percent of their 

accrued benefits as a lump-sum payment. Swiss pension funds can decide 

to allow retirees to take 100 percent of their accrued benefits as a lumpsum distribution, but officials told us this is usually only offered by small 

businesses or companies with very low or very high earners. In addition, 

officials told us Swiss law sets a mandatory minimum annuity conversion 

rate for pension benefits—the factor used to convert the accrued benefits 

into lifelong monthly payments.61 Although a minimum conversion rate 

provides some form of guarantee on the amount retirees will receive in 

annuity payments, officials and experts in Switzerland told us that the 

current rate may be too high for pension funds and insurance companies 

to meet. For example, insurance companies may be strained to provide 

benefits using the minimum conversion rate if investment earnings are 

insufficient or longevity assumptions are too low. In recent years there has 

been debate in Switzerland about lowering the minimum annuity 

conversion rate due to lower investment returns and increases in life 

expectancy.62 Another difficulty to setting a standard annuity conversion 

Widespread Use of 

Lifetime Annuities and 

Limits on Lump-Sum 

Payments Reduce Risks in 

Drawing-down Benefits 

during Retirement 

 

59According to officials, pension funds can reinsure longevity risk by contracting with an 

insurance company and if pension funds are small enough, they must be reinsured. 

60Officials told us lump-sum distributions are allowed in the Netherlands only if the annuity 

payment would be less than 400 euro (about $550, as of June 2009) per year. According to 

the OECD, the Netherlands has introduced a flexible system of purchasing annuities 

because of the recent turmoil in financial markets, allowing one-half of accumulated capital 

to be used to purchase an immediate 5-year annuity, deferring the rest of the purchase after 

this date. 

61The annuity conversion rate, currently set at 7 percent, is multiplied by the account 

balance to determine the amount of the annual annuity income. For example, an accrued 

benefit of 100,000 Swiss Francs (about $90,000 as of June 2009) would provide an annual 

annuity of 7,000 Swiss Francs (about $6,000, as of June 2009). This annuity conversion rate 

for benefits only applies to the mandatory part of the pension system. 

62Officials in Switzerland told us that the current minimum annuity conversion rate is 

scheduled to gradually decrease to 6.8 percent by 2014. There is ongoing debate on 

whether to decrease it further. 

Page 33 GAO-09-642 Private Pensions
 

rate is that using the same rate for all individuals in a given group 

generally benefits those with greater longevity. Insurers in Switzerland 

have been involved in a debate with the government in the last several 

years about using a lower annuity conversion rate, particularly for women 

because on average women live longer than men and therefore collect 

pensions for a greater number of years. 

The United Kingdom’s pension plan law requires retirees to annuitize at 

least 75 percent of their accrued benefits from pension plans, including 

Personal Accounts plans, by the age of 75, according to officials. 

Annuitizing benefits guarantees that retirees will have income for the rest 

of their lives, but it limits their access to their entire accrued benefit, 

which could, in the event of an emergency, be problematic. The 

government will facilitate the purchase of the annuities from private 

insurers. However, officials we spoke to in the United Kingdom said there 

could be some challenges in annuitizing small account balances because 

monthly payments will be very small and not cost effective to administer. 

Government officials said they are addressing this issue by allowing small 

account balances to be distributed as lump-sums.63 Like other pension 

plans, the Personal Accounts plan also will allow all retirees to take a onetime lump-sum distribution of up to 25 percent of the accrued benefit; if no 

lump-sum is taken by age 75, the entire account balance is converted into 

an annuity. This approach helps reduce the risk that retirees will outlive 

their savings while providing individuals access to some portion of their 

accrued benefits. 

In some cases annuity payments are also adjusted for inflation to mitigate 

the risk that an increase in prices erodes the purchasing power of 

retirement income. According to officials, pension boards in the 

Netherlands and Switzerland decide on a plan-by-plan basis whether to 

index retirees’ annuity benefits for inflation. In both countries, officials 

said indexation is usually applied to retirees’ benefits conditional on the 

funding level of the pension fund; also, there is no guarantee that retirees’ 

benefits will be adjusted for inflation each year. Specifically, in the 

Netherlands, officials said that if the pension plan’s funding level is above 

the minimum standard set by the Central Bank, benefits can be fully 

 

63Officials in the United Kingdom told us that, consistent with existing policy, Personal 

Accounts plans will permit small account balances below a specified threshold to be taken 

as a lump-sum, known as “trivial commutation.” This threshold is set at £16,500 (about 

$27,000 as of June 2009) in the 2008-2009 tax year. 

Page 34 GAO-09-642 Private Pensions
 

indexed for inflation.64 However, if the pension fund is below the required 

funding level, then retirees’ benefits cannot be so indexed. Officials in the 

Netherlands told us that while pension funds have regularly adjusted 

retiree benefits for inflation in the past, they are unlikely to do so in 2009 

because of the current market downturn. Additionally, officials told us 

that negotiations about benefit adjustments between active workers and 

retirees can be difficult. For example, pension fund boards, made up of 

employer and worker representatives, can decide to adjust workers’ and 

retirees’ benefits differently, although this decision is sensitive because it 

directly affects retirees’ benefits that are in payment.65 Pension boards in 

Switzerland also decide on a plan-by-plan basis whether to index pension 

benefits for inflation. Although the indexation of retirees’ benefits is not 

guaranteed, benefits are usually adjusted based on the funding levels of 

the pension fund. If pension funds in Switzerland are fully funded, the 

pension board usually grants adjustments to benefits; however, if plans are 

less than fully funded, indexation of retirees’ benefits is prohibited. 

In contrast, officials said the United Kingdom’s Personal Accounts plan 

will not require benefits to be indexed for inflation. Officials expect that 

most workers will use the savings accrued in their Personal Accounts to 

purchase basic low-cost annuities which generally do not adjust benefits 

for inflation. Officials said that because inflation has been low in the past, 

it was not a concern in designing the system. However, it represents a 

possible risk workers face in the future in terms of preserving the 

purchasing power of their benefits. 

 

64Pension funds must have a minimum funding ratio of 105 percent to apply indexation, 

according to officials. 

65Officials said that in the Netherlands the law specifies that the indexation rate applied to 

retirees’ pension benefits be the same as the one applied to the accrued benefits of workers 

who have left the employer but whose benefits are still part of the fund. 

Page 35 GAO-09-642 Private Pensions
 

Proposals for alternative pension plans designs in the United States use a 

variety of voluntary and mandatory approaches to address the risks that 

workers face; however, they also pose trade-offs. Four key proposals 

address a broad range of risks and two additional proposals focus 

specifically on addressing risks associated with retirees’ drawdown of 

lump-sum benefits by presenting options for increasing the use of 

annuities. However, the proposals also present trade-offs, including higher 

costs for workers, employers, and the federal government. Nonetheless, 

our computer modeling projections, based on a sample of workers born in 

1990, show that options to expand pension coverage can considerably 

increase the amount of income available for retirement, especially for lowincome workers 

Domestic Proposals 

Incorporate Different 

Approaches to 

Reduce Retirement 

Risks to Workers but 

also Pose Trade-offs 

Key Proposals in the U.S. 

Use Voluntary and 

Mandatory Approaches to 

Reduce a Broad Range of 

Risks 

Several proposals for alternative pension plan designs in the United States 

incorporate approaches to mitigate the risks that workers face, such as 

voluntary incentives to increase coverage or mandatory annuitization. 

Four proposals address a broad range of risks in the key areas we 

outlined: (1) The Urban Institute’s Super Simple Saving Plan, (2) The 

ERISA Industry Committee’s New Benefit Platform for Life Security, (3) 

The New America Foundation’s Universal 401(k) Plan, and (4) The 

Economic Policy Institute’s Guaranteed Retirement Accounts Plan (GRA). 

We selected these plans because they incorporate strategies to address 

risks workers face, are developed in enough detail to allow us to fully 

analyze them, are not duplicative, and have been proposed or considered 

in the last 5 years. 66 Table 7 summarizes the approaches these proposals 

use to mitigate retirement income risks faced by workers and some of the 

approaches used in each are discussed below. 

 

66In some cases multiple proposals may exist for similar designs. For example, proposals 

for a Universal 401(k) type plan also were developed by the Center for American Progress 

in A Progressive Framework for Social Security Reform and as part of the Conversation 

on Coverage (Retirement Investment Account). When this occurred, we selected the 

proposal that best fits the criteria we outline in appendix I. In addition, proposals for a 

DB(k) plan were not included in our analysis because their basic design principles were 

incorporated into the Pension Protection Act of 2006’s “eligible combined plan.” Pub. L. No. 

109-280, § 903, 120 Stat. 780, 1040-48 (codified at 26 U.S.C. § 414(x) and 29 U.S.C. § 

1060(e)). 

Page 36 GAO-09-642 Private Pensions
 

Table 7: Key Domestic Proposals for Alternative Pension Plan Designs 

Super Simple Saving 

Plan 

A New Benefit Platform 

for Life Security Universal 401(K) Plan 

Guaranteed Retirement 

Accounts Plan 

Proposal 

description 

Simplified private sector 

DC plan 

System of private-sector 

“Benefit Administrators” 

providing DB and DC 

plans 

Government-established 

DC plan 

Government-established 

hybrid DB/DC plan 

Coverage Voluntary; employers 

given incentives to offer; 

workers automatically 

enrolled if employer 

offers plan but can opt 

out. 

Voluntary; employers can 

offer a DB or DC plan 

through the centralized 

system instead of 

sponsoring their own 

plan; workers can also set 

up plans on their own 

through the centralized 

system 

Voluntary; available to 

workers without an 

employer-sponsored 

plan; workers 

automatically enrolled 

but can opt out 

Mandatory; all workers 

without an equivalent or 

better DB plan required to 

participate 

Contributions Mandatory minimum 

employer contributions of 

3% (or matching formula 

that would achieve the 

same end); default 

worker’s contribution of 

4% suggested with 

automatic escalation to 

8%; government match 

provided 

No minimum contributions 

required; employers and 

workers can contribute to 

DB and DC plans, autoescalation for DC plans is 

an option 

Proposal also includes an 

optional supplement 

calling for mandatory 

minimum worker 

contributions 

Employer contributions 

allowed but not required; 

default contribution rates 

between 3% and 5% and 

auto-escalation 

suggested for workers; 

government match for all 

workers 

Mandatory minimum 

contributions from workers 

and employers of 2.5% 

each; government 

refundable tax credit of 

$600 for all workers, 

regardless of income 

Investment Not addressed Minimum return for DB 

plans guaranteed by 

Benefit Administrators 

providing plans in the 

centralized system; 

preset fund mixes, such 

as life cycle funds, are 

offered for DC plans 

Default investment 

allocation into life cycle 

funds 

Minimum 3% annual real 

return guaranteed by the 

government 

PortabilityaFully portable; all 

contributions are fully 

vested 

Fully portable due to 

centralized structure; all 

contributions are fully 

vested 

Fully portable; all 

contributions are fully 

vested 

Fully portable due to 

centralized structure; all 

contributions are fully 

vested 

Leakage Prohibits leakage of 

employer and 

government 

contributions; allows 

loans and hardship 

withdrawals of workers’ 

contributions 

Prohibits leakage from 

DB plans but not DC 

plans; short-term savings 

account is an alternative 

tax-deferred vehicle 

designed to limit leakage 

Prohibits loans, allows 

hardship withdrawals; 

prohibits any leakage of 

government contributions 

Prohibits loans, allows 

hardship withdrawals only 

in case of disability 

Page 37 GAO-09-642 Private Pensions
 

Super Simple Saving 

Plan 

A New Benefit Platform 

for Life Security Universal 401(K) Plan 

Guaranteed Retirement 

Accounts Plan 

Fees Administrative fees 

expected to be lower 

than in current DC plans 

due to simplified plan 

design 

Administrative fees 

expected to be lower than 

in current DC plans due 

to economies of scale 

Administrative fees 

expected to be lower 

than in current DC plans 

due to economies of 

scale and limited number 

of investment options 

Administrative fees 

expected to be lower than 

in current DC plans due to 

economies of scale 

Drawdown of 

benefits 

Not addressed Mandatory annuitization 

of DB plans 

Default annuitization but 

can opt out and take a 

lump-sum instead 

Mandatory inflation 

adjusted annuity; partial 

lump-sum allowed 

Source: GAO analysis of key domestic proposals for alternative pension plan designs. 

a

When we discuss portability in this section of the report we are referring to the ability of plan 

participants to transfer accrued benefits from one plan to another. 

The Super Simple Saving Plan proposes a voluntary system of private 

sector DC accounts that includes features designed to expand coverage 

and increase contributions.67 Its goal is to establish a minimum base of 

retirement security for low- to middle-income workers by converting 

certain DC plans in the existing retirement system to a single, simplified 

DC plan.68 The Super Simple Plan is modeled on the United Kingdom’s new 

plan for Personal Accounts but, unlike the U.K. plan, employers are not 

required to offer it to their workers. The Super Simple Plan adopts 

approaches intended to address risks related to coverage, contributions, 

portability, leakage, and fees (see table 7). The proposal’s authors told us 

that many of the details about the approaches used in the Super Simple 

plan are subject to variation, such as the contribution rates, although they 

offer suggestions with respect to those details. In particular, the plan 

suggests the approaches outlined in table 8 to address risks related to 

coverage and contributions. 

Super Simple Saving Plan 

 

67Pamela Perun and C. Eugene Steuerle. “Why Not a “Super Simple” Saving Plan for the 

United States?” Washington, D.C., The Urban Institute, 2008. 

68All current standard 403(b) plans and SIMPLE and Safe Harbor plans could be converted 

to Super Simple plans. Existing 401(k) plans would be grandfathered in, but would also 

have the option of converting to Super Simple plans. 

Page 38 GAO-09-642 Private Pensions
 

Table 8: The Super Simple Saving Plan’s Approaches to Coverage and Contributions 

Risk area Employer Worker Government 

Coverage Voluntary—Incentives 

Provides incentives for employers 

to adopt the plan, including a 

simplified plan design intended to 

lower administrative costs by 

eliminating annual 

nondiscrimination testing and 

reporting requirements, and 

providing government matching 

contributions and higher 

contribution limits than allowed in 

standard 401(k) plans.a

 

Voluntary—Automatic enrollment 

If employer adopts the plan, all but 

very short-term workers are 

covered and are automatically 

enrolled. 

Workers can opt out if they do not 

want to participate. 

Not applicable 

Contributions Mandatory—if participating 

3% of pay suggested amount of 

mandatory minimum contribution 

(or matching formula that would 

achieve the same end). 

Employers can contribute more as 

long as they contribute the same 

percentage of pay for all their 

workers. 

Mandatory—if participating 

4% of pay default contribution 

suggested with automatic 

escalation up to 8% through annual 

or biennial 1% of pay increases. 

Workers can choose to contribute 

more or less than the default. 

Matching contribution—refundable 

tax credit 

Design has been left open to 

discussion, but authors suggest 

some potential match rates: 

Equal to a percentage of employer 

and worker contributions up to some 

amount 

1% match of pay 

2% match of pay on the first $10,000 

of wages 

Source: GAO analysis of Super Simple Saving Plan proposal. 

a

In 2008, workers participating in standard 401(k) plans could contribute up to $15,500 from their own 

funds and the total contribution including employer contributions could not be more than $46,000. The 

Super Simple plan would allow all workers to contribute up to a flat dollar amount, such as $46,000, 

minus any employer contributions. Business owners can also establish plans for themselves as 

employees of the company and make tax-preferred worker contributions up to the legal limit. 

Administrative and legal changes required by the Super Simple proposal 

include eliminating the reporting and nondiscrimination testing 

Page 39 GAO-09-642 Private Pensions
 

requirements and replacing the Saver’s Credit with government matching 

contributions (see app. III).69

The New Benefit Platform for Life Security proposes a voluntary system in 

the private sector to provide DB and DC plans as an alternative to the 

employer-based system and includes features to increase coverage and 

portability, and guarantees a minimum investment return to DB plans. 70 A 

primary goal of the New Benefit Platform is to expand benefits to a larger 

base of the population. The plan’s structure separates plan governance 

from the employer, which is similar to the independent governance 

structures that private pension plans have in the Netherlands, Switzerland, 

and the United Kingdom The plans would be administered and managed 

independently from employers by a system of either non- or for-profit 

Benefit Administrators that compete with each other in the private sector 

on quality, design, and cost, according to the proposal’s author. Benefit 

Administrators could either provide the benefits directly or arrange for 

third parties to provide them. Benefit Administrators will assume the 

liability deemed appropriate for the benefits they provide. According to 

the proposal’s author, fiduciary responsibility should follow function, thus 

the Benefit Administrators would bear much of the fiduciary 

responsibility. Employers would still have some responsibility for due 

diligence related to the arrangements they offer through the plan. The New 

Benefit Platform includes approaches intended to reduce risks related to 

coverage, contributions, investments, portability, leakage, fees, and the 

drawdown of benefits in retirement (see table 7). In particular, the plan 

uses the approaches outlined in table 9 to address risks related to 

coverage, portability, and investments. 

A New Benefit Platform for Life 

Security 

 

69Nondiscrimination requirements provide that private employers who sponsor taxqualified pension plans must meet certain requirements regarding how benefits or 

contributions are distributed between rank-and-file employees and highly compensated 

employees, such as company executives and owners. The Saver’s Credit is a tax benefit for 

low- and moderate-income individuals that make voluntary contributions to employersponsored retirement plans or individual retirement arrangements. In 2009, married 

couples filing jointly with incomes below $55,500, taxpayers filing as head of household 

with incomes below $41,625, and single taxpayers (including married individuals who file 

separately) with incomes below $27,750 qualify for the credit. It is provided in addition to 

other tax benefits which may result from the retirement contributions. For example, most 

workers at these income levels may deduct all or part of their contributions to a traditional 

IRA. 

70The ERISA Industry Committee. “A New Benefit Platform for Life Security” Washington, 

D.C., The ERISA Industry Committee, 2007. The New Benefit Platform also includes a taxpreferred short-term savings account and health care benefits in its system. 

Page 40 GAO-09-642 Private Pensions
 

Table 9: The New Benefit Platform for Life Security’s Approaches to Coverage, Portability, and Investments 

Risk area Employer Worker Government 

Coverage Voluntary 

Employers can offer their workers 

a DB plan, a DC plan, or both 

through Benefit Administrators 

instead of sponsoring a traditional 

DB or DC plan. 

Employers can add an automaticenrollment feature to the DC plan 

Voluntary 

All workers may be automatically 

enrolled into a DC or DB plan, but 

can opt out. 

Workers whose employers do not 

offer a plan, including selfemployed, part-time, and 

contingent workers, can also 

independently join a Benefit 

Administrator’s plan. 

Not applicable 

Portability The centralized plan structure facilitates portability, as workers can 

keep the same account when they change employers. 

The government establishes 

uniform service areas throughout 

the country for each of the core 

benefits (retirement and health) so 

that two or more Benefit 

Administrators would be available 

to every employer and individual 

worker. 

Investments In the DB plan, Benefit Administrators guarantee the principal—

employers’ and workers’ contributions—and a rate of return on the 

investments, such as 3%, or an indexed rate.a Benefit Administrators 

providing the plans manage DB plan assets; there are no self-directed 

DB accounts. 

Not applicable 

Source: GAO analysis of A New Benefit Platform for Life Security proposal. 

a

The proposal suggests options for a guaranteed rate of return but does not specify a set amount. 

The author anticipates that Benefit Administrators would develop competing products that could 

provide real or nominal rates of return. 

Administrative and legal changes required by the New Benefit Platform 

include transferring most fiduciary liability from employers to Benefit 

Administrators, and simplifying nondiscrimination rules.71 The federal 

government would also have to set standards for Benefit Administrators 

and regulate the system (see app. III). 

 

71Under current law, plan sponsors are generally plan fiduciaries. 29 U.S.C. § 1002(21). With 

limited exception, they retain liability for ensuring that plans are administered solely in the 

interest of participants and, for example, to provide plan benefits and defray reasonable 

expenses for administration, even if they utilize the services of third parties to assist with 

plan administration. 29 U.S.C. § 1104. 

Page 41 GAO-09-642 Private Pensions
 

The Universal 401(k) Plan proposes a voluntary system of DC accounts 

that incorporates several automatic and default features.72 Its primary goal 

is to give every worker access to a government-administered DC 

retirement savings account. It is similar to the United Kingdom’s Personal 

Accounts Plan, which was established by the government to increase 

saving by low- and middle-income workers and the author told us it is 

intended to supplement, not replace, the existing retirement system.73 The 

Universal 401(k) accounts are provided through a centralized 

clearinghouse structure that is established and administered by the federal 

government as an alternative to the current system of employer-sponsored 

retirement plans geared toward low- and middle-income workers whose 

employers generally do not offer any plan. The Universal 401(k) Plan 

adopts approaches intended to reduce risks related to coverage, 

contributions, investments, portability, leakage, fees, and the drawdown of 

benefits in retirement (see table 7). In particular, the plan uses the 

approaches outlined in table 10 to address risks related to coverage, 

contributions, investments, and the drawdown of benefits in retirement. 

Universal 401(k) Plan 

Table 10: The Universal 401(k) Plan’s Approaches to Coverage, Contributions, Investments, and the Drawdown of Benefits in 

Retirement 

Risk area Employer Worker Government 

Coverage Employers facilitate enrollment 

through W-4 forms unless they 

already cover their workers in an 

employer-sponsored plan. 

Voluntary—Automatic enrollment 

All workers not participating in an 

employer-sponsored retirement 

plan, including part-time workers 

and recent hires not yet eligible for 

employer-sponsored plans, are 

automatically enrolled in the 

Universal 401(k). 

Workers can opt out if they do not 

want to participate. 

The government establishes a 

Universal 401(k) plan that gives 

every worker access to a retirement 

savings plan. 

 

72Michael Calabrese, “A Universal 401(k) Plan,” Washington, D.C., The New America 

Foundation, 2007. See also, Michael Calabrese, “Universal 401(k): A Retirement Saving Plan 

for Every Worker,” Testimony before the Subcommittee on Health, Employment, Labor & 

Pensions, Committee on Education and Labor, U.S. House of Representatives, Washington, 

D.C., 2007. 

73Unlike the United Kingdom’s plan, which transfers the plan management and 

administration to a nongovernmental trustee corporation, the U.S. government retains 

responsibility for running the Universal 401(k) plan. 

Page 42 GAO-09-642 Private Pensions
 

Risk area Employer Worker Government 

Contributions Voluntary 

Employers can contribute but are 

not required to. 

If employer contributions are 

made, they are limited to a flat 

percentage of wages or a flat 

dollar amount and must be made 

for all workers, including part-time 

workers. 

Voluntary—Default levels 

3% to 5% of pay default 

contribution with automatic 

escalation up to 8% through 

annual 1% of pay increases 

suggested. 

Workers can choose to contribute 

more or less than the default 

amount. 

Matching contribution—refundable 

tax credit deposited directly into 

workers’ accounts; suggested match 

levels: 

1:1 match on the first $2,000 in 

savings for workers earning up to 

$40,000. 

1:2 match on the first $4,000 in 

savings for workers earning more 

than $40,000. 

Investments Not applicable Default investment allocation, such 

as a life cycle fund, is provided. 

Workers who want to make their 

own investment decisions can 

choose from a limited number of 

broad and low-cost index funds. 

The government offers a very 

limited number of broad and lowcost index funds for workers to 

invest in, as well as a default 

investment option, such as a life 

cycle fund. 

Drawdown of benefits Not applicable Account balances are 

automatically converted to 

annuities that are purchased 

through the federal government at 

group rates.a Workers can opt out 

of the annuity and take a lumpsum distribution. 

Facilitates annuity purchases either 

by contracting with one or more 

private sector insurers or by 

managing the annuity payments 

through the Pension Benefit 

Guaranty Corporation, a federally 

chartered corporation established to 

insure pension benefits in qualified 

DB plans. 

Source: GAO analysis of Universal 401(k) Plan proposal. 

a

Inflation-adjusted annuities and deferred annuities are not addressed in the proposal but the author 

told us they could be options. 

Key legal and administrative changes required by this plan include 

establishing a federally chartered clearinghouse to set up and manage 

workers’ accounts, as well as expanding the Saver’s Credit and making it 

refundable (see app. III). 

The Guaranteed Retirement Accounts Plan proposes a mandatory system 

of hybrid accounts with DB and DC features designed to increase coverage 

and contributions and preserve retirement benefits.74 Its goal is to increase 

retirement saving by low- and middle-income households and provide a 

basic retirement income for workers. Many of its features are similar to 

those found in the Swiss pension system except it is a governmentGuaranteed Retirement 

Accounts Plan 

 

74Teresa Ghilarducci, “Guaranteed Retirement Accounts: Toward Retirement Income 

Security” Washington, D.C., Economic Policy Institute, 2007. 

Page 43 GAO-09-642 Private Pensions
 

sponsored system instead of an employer-based system. The accounts are 

similar to the hypothetical accounts set up in hybrid DB plans, like cash 

balance plans, and are established and administered by the federal 

government. The proposal adopts approaches to address risks related to 

coverage, contributions, investments, portability, leakage, fees, and the 

drawdown of benefits in retirement (see table 7). In particular, the plan 

uses the approaches outlined in table 11 to address risks related to 

coverage, contributions, investments, and the drawdown of benefits in 

retirement. 

Table 11: The Guaranteed Retirement Accounts Plan’s Approaches to Coverage, Contributions, Investments, and the 

Drawdown of Benefits in Retirement 

Risk Area Employer Worker Government 

Coverage Mandatory 

Employers must provide the GRA 

for all workers who are not 

covered by a qualifying DB plan.a

Mandatory 

All workers who are not covered 

by an equivalent or better 

employer-sponsored DB plan must 

participate. 

Workers whose employers are not 

required to cover them, for 

example independent contractors, 

must enroll on their own. 

The government establishes a hybrid 

DB/DC plan for all workers that are 

not covered by a qualifying DB plan. 

ContributionsbMandatory 

Mandatory minimum 2.5% of pay 

contribution, up to the Social 

Security earnings cap. 

Higher contribution rates are 

allowed. 

Mandatory 

Mandatory minimum 2.5% of pay 

contribution, up to the Social 

Security earnings cap. 

Higher contribution rates are 

allowed. 

Contribution—$600 refundable tax 

credit for all workers (adjusted for 

inflation). 

If the amount of the worker’s 

contribution is less than $600, the 

difference is deposited directly into 

the worker’s account.c

Investments Not applicable Minimum 3% real return on 

investment guaranteed. 

Guarantees a minimum 3% real 

annual return on investment. 

If actual investment returns are lower 

than 3% in a given year, uses 

surplus funds it saved in years when 

returns were higher to contribute the 

difference to workers’ accounts.d

Drawdown of benefits Not applicable Mandatory annuitization 

Workers must convert most of 

their accumulated benefits to an 

inflation-adjusted annuity. 

Workers also can take a partial 

lump-sum distribution, either 

$10,000 or 10% of their account 

balance, whichever is higher, and 

leave half of their remaining 

account balances to their heirs.e

Facilitates annuity purchases at 

group rates from an insurance 

company. 

Source: GAO analysis of Guaranteed Retirement Accounts proposal. 

Page 44 GAO-09-642 Private Pensions
 

a

A DB plan qualifies for the exemption criteria if the plan sponsor contributes at least 5 percent of 

payroll to it each year and pays out retirement income as an annuity. A 5-year average contribution 

rate would be used to determine whether plans met the exemption criteria. DB plan sponsors who 

make sporadic and uneven contributions would not qualify, but hybrid plans like cash-balance plans 

would qualify as long as contributions to it are at least 5 percent of payroll and retirement income is 

paid out as an annuity. 

b

All contributions (employer, worker, and government) are apportioned evenly between husbands and 

wives. 

c

The new $600 tax credit replaces the current favorable tax treatment of employer and worker 

contributions to DC plans. However, a revenue tax credit of $400 would allow tax-qualified 

contributions up to $5,000 per year to DC plans and would be adjusted for inflation. 

d

If actual returns are consistently higher than 3 percent over a number of years, part of the surplus 

could be distributed to participants. The government would have the ability to lower the amount of the 

guarantee in the event of a protracted period of low returns. 

e

Workers may bequeath their own contributions plus interest earnings on them, but not the employer’s 

contributions, to their heirs. 

Key legal and administrative changes required by this plan include 

establishing and administering a system of retirement accounts by the 

federal government, information sharing by state and local governments, 

and reducing the current preferential tax treatment of DC plans, such as 

401(k) plans (see app. III).75

Two additional proposals focus specifically on addressing risks associated 

with retirees’ drawdown of lump-sum benefits by presenting options for 

increasing the use of annuities as a way to pay out benefits accumulated in 

DC plans.76

Annuitization Proposals 

 

75The original Guaranteed Retirement Accounts proposal calls for an elimination of tax 

preferences for DC plans, such as 401(k) plans. The author has since updated this provision 

of the proposal and would now allow tax preferences for contributions to DC plans up to 

$5,000, adjusted for inflation. 

76Annuities are the standard benefit payment option for DB plans, although some DB plans 

also allow lump-sum payments. 

Page 45 GAO-09-642 Private Pensions
 

Although retirement experts agree that annuities can reduce longevity risk 

and complex decision making about how to draw down retirement assets 

over time, the annuity market faces challenges. In the private market, 

people who buy individual annuities tend to be those who expect to live 

longer than average. A person who chooses to purchase an annuity may 

have information about his or her health, habits, or family history that the 

insurance company does not have regarding their risk of living longer than 

average. This phenomenon, called “adverse selection,” leads to higher 

annuity premiums than insurers would otherwise have to charge if the 

longevity risk were spread over the entire population so that gains from 

early deaths would be aggregated with longer than average lives, for cost 

purposes. Two proposals seek to overcome this challenge by increasing 

the number and type of workers that purchase annuities and providing 

access to group rates, which tend to be lower than rates for individual 

annuities. 

Types of Annunities

Annuities come in a variety of forms, and new 

products are being developed by the 

insurance industry. Well-known annuity 

products include: 

Single-life annuity—Provides fixed monthly 

benefit payments guaranteed for life. No 

survivor benefit is paid after the annuitants’

death (also called a straight-life annuity).

Joint and survivor annuity—Provides fixed 

monthly benefit payments guaranteed for life 

and, upon the annuitants’ death, continues

partial payments to the surviving spouse or 

other beneficiary for the rest of his or her life. 

Inflation-indexed annuity—Provides monthly 

benefit payments guaranteed for life that 

increase to keep up with inflation. Annual 

increases may be cost-of-living increases or 

linked to the Consumer Price Index. 

Variable annuity—Provides monthly benefit 

payments guaranteed for life that may 

increase or decrease based on performance of 

underlying investments the purchaser selects. 

Deferred annuity—Monthly benefit payments

are purchased over time but are not scheduled 

to begin until a person retires and then are 

guaranteed for life. 

Longevity annuity—A type of deferred 

annuity generally purchased at the time of 

retirement that provides a guaranteed stream 

of income typically starting after a late age, 

such as 85.

Automatic Trial Income. Retirees with DC plans would have a 

substantial portion of their account balance directed into a 2-year trial 

annuity when they retire unless they affirmatively choose to opt out.77

After the 2-year period, the trial annuity would convert to a permanent one 

unless the retiree made an affirmative decision to take a lump-sum 

distribution instead. Employers could contract with insurance companies 

to provide the trial and permanent annuity products to workers at group 

rates. Employers also select the types of annuity products that would be 

offered to their workers, for example, annuities that are adjusted for 

inflation. 

Security “Plus” Annuity. Workers with DC plans have a one-time 

opportunity during their first year of retirement to purchase a basic life 

annuity, of up to $100,000.78 The annuity is intended to be low cost, simple, 

widely available, and easy to understand and purchase. Annuities are 

purchased from private sector insurance companies at group prices 

through a program facilitated by the federal government. Through a 

competitive bidding process, the federal government pre-selects a private 

market annuity provider to underwrite Security “Plus” annuities on a 

group basis. The federal government provides record-keeping, marketing, 

 

77W.G. Gale, J.M. Iwry, D.C. John, and L. Walker. “Increasing Annuitization in 401(k) Plans 

with Automatic Trial Income.” Washington, D.C., The Retirement Security Project, 2008. 

78The Aspen Institute. “Savings for Life: A Pathway to Financial Security for All Americans.” 

New York, NY, The Aspen Institute, 2007. 

Page 46 GAO-09-642 Private Pensions
 

distribution and other administrative services and pays out annuity 

benefits with Social Security benefits. The basic annuities are a single life 

annuity for single retirees and a joint-and-survivor annuity for married 

retirees. Whether or not the annuities are adjusted for inflation or offer 

other features depends on the willingness and ability of the insurance 

companies to offer them. 

Proposals also Pose Tradeoffs for Workers and 

Employers 

The approaches the proposals use to address risks present trade-offs and 

costs for workers and employers, and in some cases the federal 

government. In particular, important trade-offs and concerns arise with 

mandating coverage and contributions, guaranteeing investment returns, 

using life cycle funds, and annuitizing benefits. Trade-offs also arise with 

approaches to prohibiting preretirement benefit leakage, centralizing the 

private pension system, and changing existing tax incentives for 

contributing to DC plans. 

Mandating employers to provide retirement benefits or workers to 

participate and contribute to a pension plan, as the GRA does, ensures that 

most, if not all, workers will have some level of retirement income beyond 

Social Security; however, such mandates also can pose burdens for some 

workers and employers.79 Several retirement experts and industry 

professionals we spoke to, including one who would not support the use 

of mandates in practice, said that making participation mandatory is a way 

to increase retirement plan coverage. However, such mandates represent a 

significant departure from the existing voluntary private pension system in 

the United States, and several retirement experts said that their adoption 

may not be feasible.80 Furthermore, requiring workers and employers to 

contribute to any type of pension plan diverts funds from other uses, 

including employers’ business expenses and workers’ competing demands 

for basic necessities. For example, employers may pass on the cost of 

Mandates 

 

79A mandatory retirement system cannot ensure 100 percent coverage if certain groups, 

such as very low-income workers, are exempt from the mandate. 

80Because all DC plans and some DB plans will not meet the GRA proposal’s mandatory 

eligibility requirements, the proposal could potentially replace a significant part of the 

existing private pension system. A DB plan meets the criteria if the plan sponsor 

contributes at least 5 percent of payroll to it per year and pays out retirement income as an 

annuity. A 5-year average contribution rate would be used to determine whether plans met 

the exemption criteria. DB plan sponsors who make sporadic and uneven contributions 

would not qualify, but hybrid plans like cash-balance plans would qualify as long as 

contributions to it are at least 5 percent of payroll, and retirement income is paid out as an 

annuity. 

Page 47 GAO-09-642 Private Pensions
 

contributing to a pension plan by reducing workers’ current 

compensation. The impact of this diversion may be disproportionately 

greater for lower-income workers and small businesses whose financial 

resources are more constrained. 

On the other hand, voluntary approaches to increasing coverage and 

contribution rates allow individual workers and employers to choose 

whether or not to participate in a pension plan but, as the current system 

illustrates, cannot ensure that all workers will be covered by a pension 

plan. Several retirement experts have noted that voluntary approaches 

that change the decision-making framework, such as an auto-enrollment 

approach that allows workers to opt out, default contribution levels, and 

automatic contribution escalation, as used in the Super Simple and 

Universal 401(k) plans, overcome workers’ inertia because they do not 

require active decision making about the extent of their participation and 

are effective alternatives to a mandate. However, increasing participation 

also may increase costs for employers that contribute to DC plans because 

now they would be making contributions for a greater number of workers, 

unless they reduced the amount of their contributions to all workers to 

keep the total cost the same. In addition, because such approaches are still 

voluntary, some workers will continue to lack coverage or contribute too 

little. 

Guaranteeing investment returns, an approach used in the GRA and New 

Benefit Platform proposals, also has advantages and disadvantages. A 

guarantee can protect workers from market fluctuations and can ensure a 

minimum level of benefit. In the short term, particularly when stock 

market investment returns are negative, guarantees can protect workers’ 

pension plan balances from significant losses and, depending on their 

design, can also protect benefits from being eroded by inflation. However, 

guaranteeing investment returns raises several issues related to its design 

and cost. A key consideration is determining who will be responsible for 

providing the guarantee. The provider could be from the private sector, for 

example an insurance company or a Benefit Administrator as in the New 

Benefit Platform proposal, or the federal government could provide the 

guarantee as the GRA plan proposes. Additionally, what the guarantee 

covers and the level at which it is set is a key design factor that can have a 

significant impact on its cost and its effectiveness. For example, the higher 

the level of the guarantee, the more costly it could be. However, higher 

guarantees can also be more effective at protecting workers from market 

fluctuations. Conversely, setting guarantees at lower levels, while 

potentially cheaper, does not offer workers as much protection. The 

Guarantees 

Page 48 GAO-09-642 Private Pensions
 

guarantee would have to be set at a level that the provider is able to 

sustain or it may result in significant governmental costs. 

Additional issues raised in designing a guarantee include what to do with 

surpluses, if any, realized from investment returns that exceed the 

guarantee level and how to fund shortfalls when investment returns are 

lower than that level. For example, the guarantee’s provider could save 

surpluses and use them to cover shortfalls or pass the surplus returns on 

to workers. While passing the surplus on to workers increases their 

pension benefits, it also leaves less available for shortfalls and could 

deplete the surplus more quickly, potentially increasing the guarantee 

provider’s costs. One way for the provider to manage this cost is to design 

the guarantee in a way that allows it to lower the level of the guarantee in 

the event of a protracted period of low investment returns, as the GRA 

plan proposes. However, lowering the guarantee also could reduce 

workers’ and employers’ confidence in the pension plan. Alternatively, the 

provider could pass on this cost to plan participants, or if the government 

provides the guarantee, taxpayers. 

Another approach used to address investment risk in DC plans, life cycle 

funds, also has strengths and weaknesses. While industry officials told us 

that life cycle funds are an important step forward in reducing the 

complexity of individual decision making about appropriate investment 

allocations, they also said they are not a complete solution and are still 

evolving. Workers still bear investment risk individually and recent 

experiences show that this risk may be substantial. For example, life cycle 

funds with a target retirement date of 2010 are reported to have lost 25 

percent of their value on average in 2008, just 2 years before workers 

investing in them plan to retire. Officials at one retirement policy 

organization told us that one of the challenges life cycle funds face is 

striking the right balance between providing a steady stream of income in 

the near term and obtaining sufficient investment returns to address 

longevity and inflation risks in the long term. 

Life Cycle Funds 

Trade-offs also exist with using annuities to distribute benefits 

accumulated in DC plans during retirement. Annuities are advantageous 

because they provide a stable and predictable stream of income that is 

guaranteed to last retirees for the rest of their lives and reduce the burden 

of actively managing the drawdown of benefits. However, many retirement 

experts have noted their drawbacks, including their costs. A key concern 

is that some annuitants may die early in their retirement and will not 

realize much benefit from their purchase. This also raises equity issues 

about annuities, as those in certain income groups tend to live longer than 

Annuities 

Page 49 GAO-09-642 Private Pensions
 

others and women tend to live longer than men. While annuities by their 

nature depend on such differences to spread risks among a large pool of 

retirees, mandating annuities for groups which have lower average life 

expectancies, such as low income workers, raises questions about 

fairness. Also, annuitants no longer have access to their assets in the event 

of an emergency and generally cannot leave a bequest to their heirs. While 

retirees could choose to annuitize a portion of the account balance (which 

would provide a lower monthly benefit) and leave the remainder as a lump 

sum that they could access in an emergency or leave to their heirs, 

insurance industry officials told us that not many people realize they have 

this option. 

Other trade-offs arise in prohibiting leakage, centralizing the private 

pension system, and changing tax incentives. Prohibiting or further 

restricting leakage, as proposed in the Super Simple, Universal 401(k), and 

GRA plans, preserves the amount of retirement savings available for 

retirement and allows workers to accrue higher benefits in the long term 

than if they withdrew funds from their DC accounts early. However, 

retirement experts have noted that prohibiting hardship withdrawals and 

loans also can make workers worse off in the short term if they face a 

financial emergency, such as a pending home foreclosure, and do not have 

other savings to draw from. GAO has reported in the past that allowing the 

possibility of loans and hardship withdrawals provides a strong incentive 

for participation in a voluntary system, especially among low- to middleincome workers.81 In addition, loans that are repaid may not have an 

adverse effect on workers’ retirement savings because the worker returns 

the money to the retirement account. 

Other Trade-offs 

As an alternative to the current employer-based system, centralizing the 

private pension system in either the private sector or the government has 

advantages such as facilitating portability and taking advantage of 

economies of scale to manage administrative costs. While establishing 

such a system may also reduce employers’ administrative duties and, 

potentially, some of their individual fiduciary responsibilities, it may also 

be a costly and complex effort that requires new regulatory and oversight 

efforts. These costs could be passed on to workers, employers, and 

taxpayers in general. 

 

81 See GAO 401(k) Pension Plans: Loan Provisions Enhance Participation But May 

Affect Income Security for Some, GAO/HEHS-98-5 (Washington, D.C.: Oct. 1, 1997). 

Page 50 GAO-09-642 Private Pensions
 

In addition, providing a government contribution or credit by expanding 

the Saver’s Credit, as suggested in the Super Simple, Universal 401(k), and 

GRA proposals, increases retirement benefits for workers, but also 

increases costs for the government because more people would receive it. 

Reducing preferential tax treatment for contributions to DC plans, such as 

401(k) plans, could partially offset this cost, as proposed in the GRA plan, 

however workers currently contributing more than the $5,000 limit to 

those plans would be made worse off. Some workers would have to pay 

income taxes on more of their earnings because the amount of the 

government’s refundable tax credit to offset the cost of contributions is 

$600 for all workers regardless of their income or amount of their 

contribution. 

Options to Expand 

Coverage Substantially 

Increase Projected 

Benefits 

Our microsimulation modeling projections, based on a sample of workers 

born in 1990, show that options to expand pension coverage considerably 

increase the amount of income available for retirement, especially for lowincome workers.82 While there are various options that could be used to 

address a number of key risks workers face in accumulating and 

preserving pension benefits, we modeled three options to expand 

coverage to provide an example of how such changes might affect the 

amount of income available for retirement as compared to a baseline 

scenario reflecting current law and trends. These options incorporate 

some generic features of U.S. proposals, but do not represent any proposal 

in its entirety. The trade-offs these options entail are similar to those 

discussed above for mandatory and voluntary approaches to increasing 

coverage and contributions. The first option we model expands access to a 

DC plan for workers by requiring all employers that do not currently offer 

a pension plan to sponsor a DC plan with no employer contribution (i.e., 

universal access). The second and third options we model build on 

universal access by incorporating automatic enrollment and mandatory 

participation, respectively. While each option increases pension benefits 

and the percentage of workers with DC savings at retirement, mandatory 

participation in combination with universal access provides the largest 

overall gains compared to the baseline. Although these assumptions 

 

82We used the 1990 birth cohort for our simulations so that policy options, if implemented 

in the near future, would be in effect for the majority of this cohort’s working life. 

Page 51 GAO-09-642 Private Pensions
 

represent stylized scenarios, they illustrate the potential effect of such 

changes on coverage and benefits.83

Modeling scenarios to expand coverage 

Universal access—All employers that do not sponsor a plan are required to provide a 

DC plan with no employer contribution. Existing employer-sponsored plans are not 

affected. 

Universal access with automatic enrollment—In addition to universal access, as 

described above, all DC plans have automatic enrollment in which individuals must 

affirmatively opt out of participating in the plan. 

Universal access with mandatory participation—In addition to universal access, all 

workers with access to a DC plan are required to participate. 

We project DC pension benefits for a stylized scenario where all 

employers that do not currently offer a pension plan are required to 

sponsor a DC plan with no employer contribution (universal access). 

Requiring universal access where participation is voluntary increases the 

share of workers with DC savings at retirement from about 67 percent to 

just over 79 percent (see table 12). The increase in coverage is greatest for 

low-income workers—the share of workers with DC savings at retirement 

increases from about 48 percent to about 63 percent for those in the first 

income quartile, an increase of about one-third. Overall, requiring 

universal access increases the average amount of annual income in 

retirement provided by a DC plan, as measured by the annuity equivalent, 

by about 12 percent. 

 

83Our projections assume stocks return an annual non-stochastic real rate of return of 2.9 

percent, equivalent to the government bond rate. In an alternate simulation, we assume 

stocks earn an annual non-stochastic real rate of return of 4.9 percent and find similar 

effects for each policy option (see app. I, table 13). Using different rates of return reflects 

assumptions used by the Social Security Administration’s Office of the Chief Actuary 

(OCACT) in some of its analyses of trust fund investment. 

Page 52 GAO-09-642 Private Pensions
 

Page 53 GAO-09-642 Private Pensions 

Table 12: Projected Average Household Annuity Equivalents and Projected 

Percentage of Workers with DC Savings at Retirement, by Income, under Different 

Scenarios 

By income quartile 

 Overall 1 2 3 4

Baseline results 

Household annuity equivalent (per 

year, 2008 dollars) 

$15,217 $2,761 $7,780 $16,331 $33,996

Percentage of workers with DC 

savings at retirement 

66.9% 47.5% 64.6% 74.3% 81.3%

Universal access 

Household annuity equivalent (per 

year, 2008 dollars) 

$17,058 $3,211 $8,943 $18,614 $37,465

Percentage of workers with DC 

savings at retirement 

79.2% 62.9% 78.4% 85.8% 89.8%

Universal access with auto-enrollment

Household annuity equivalent (per 

year, 2008 dollars) 

$18,556 $3,921 $10,276 $20,340 $39,668

Percentage of workers with DC 

savings at retirement 

90.6% 84.3% 90.4% 93.1% 94.6%

Universal access with mandatory participation

Household annuity equivalent (per 

year, 2008 dollars) 

$21,312 $5,157 $12,367 $23,461 $44,260

Percentage of workers with DC 

savings at retirementa

96.6% 95.6% 96.5% 97.0% 97.2%

Source: GAO calculations of PENSIM simulation. 

Note: Some of the model assumptions include the following: (1) workers use all accumulated DC plan 

balances to purchase an inflation-adjusted annuity at retirement, between ages 62 and 70; (2) 

participants invest all plan assets in life cycle funds; (3) stocks earn an average annual 2.9 percent 

real return. Quartiles are based on the distribution of lifetime earnings. No default or minimum 

contribution rates were specifically defined for the three scenarios, rather the contribution rates are 

produced by PENSIM in the same manner as they are for those who voluntarily participate in the 

baseline scenario. We have no evidence on what contribution rates new participants would choose 

under the three scenarios we analyzed, but it may be lower than the contribution rates chosen by 

those that voluntarily participate in the baseline scenario. See appendix I for more details. 

a

Our modeling assumptions do not alter current standards for eligibility. Thus, under universal access 

with mandatory participation, some workers, such as part-time workers who work less than 1,000 

hours a year, may not be eligible for pension coverage according to plan provisions. 

Under the second scenario, automatic enrollment is added as an additional 

requirement for all DC plans and further raises projected DC pension 

coverage and benefits. Combining the requirement for universal access to 

a plan with automatic enrollment where workers can opt out of coverage 

increases the share of workers with DC savings at retirement to almost 91 

percent. The largest increase occurs for those in the lowest earnings 
 

quartile—the share of workers with DC savings at retirement increases 

from about 63 percent under universal access to just over 84 percent 

under universal access with automatic enrollment. Overall, average 

projected DC pension income further increases to $18,556 a year. 

Finally, we model a third scenario in which, in addition to universal 

access, all workers with a DC plan are required to participate. Our 

simulations show that, of the three options modeled, mandatory 

participation provides the largest overall gains compared to the baseline in 

the percentage of workers with savings at retirement and the amount of 

pension benefits. For each income quartile, the share of workers with DC 

savings at retirement increases to more than 95 percent.84 The biggest gain 

occurs for low-income workers—the share of workers with DC savings at 

retirement increases from 84 percent under universal access with 

automatic enrollment to almost 96 percent under mandatory participation. 

Accordingly, the average amount of DC pension income available in 

retirement further increases by about 15 percent overall compared to 

universal access with automatic enrollment. Unsurprisingly, among lowincome workers, average DC pension income increases by about 32 

percent with universal access and mandatory participation compared to 

universal access with automatic enrollment. 

The current financial crisis clearly illustrates the need to make the 

employer-sponsored pension system more secure, but even in good 

economic times many U.S. workers are exposed to numerous risks. 

Despite significant tax incentives, only about 50 percent of the private 

sector workforce is covered by a retirement plan. Employers continue to 

freeze and terminate traditional DB plans. For workers who have access to 

a DC plan, account balances are low, even for many of those close to 

retirement. Many experts agree reforms are needed to make the U.S. 

private pension system more effective in protecting workers from risks to 

accumulating and preserving adequate savings for retirement. If no action 

is taken, a considerable number of Americans face the prospect of a 

reduced standard of living in retirement. 

Concluding 

Observations 

 

84Our modeling assumptions do not alter current standards for eligibility. Thus, under 

universal access with mandatory participation some workers, such as part-time workers 

who work less than 1,000 hours a year, may not be eligible for pension coverage according 

to plan provisions. 

Page 54 GAO-09-642 Private Pensions
 

The international systems and domestic proposals we reviewed represent 

different approaches to addressing key retirement risks and point the way 

toward possible solutions to some of the problems faced by the U.S. 

pension system. For example, alternative models could be used to 

distribute investment risks across workers, employers, and retirees, which 

may reduce the volatility workers face with self-directed individual 

accounts. In the current economic environment, approaches used in other 

countries and domestic proposals to address risks workers face in 

accumulating and preserving pension benefits may warrant consideration. 

However, new approaches raise a number of issues that would have to be 

addressed, including the relative roles of workers, employers, and the 

government, particularly with regard to contributions, how such a system 

would be administered, and its relationship to both Social Security and the 

existing private pension system. 

Neither the pension systems in other countries we reviewed, nor the 

domestic proposals constitute a panacea for the challenges of the U.S. 

pension system. No system or proposal is perfect and each requires careful 

consideration of the trade-offs between its advantages, costs, and 

responsibilities. Despite important social, economic, and institutional 

differences between the United States and these countries, key features 

from these models, as well as the domestic proposals, are relevant and 

could potentially offer some solutions for the U.S. pension system. Taken 

together, these key features could be used to more comprehensively 

address risks workers face. The challenge for Congress will be to balance 

the interests and responsibilities of workers, employers, and the 

government and find the most promising steps to help Americans achieve 

retirement security. 

We obtained technical comments on a draft of this report from the 

Department of Labor and the Department of the Treasury, and 

incorporated them throughout the report, as appropriate. The Department 

of State did not have any comments on the draft report. 

Agency Comments 

and Our Evaluation 

As agreed with your office, unless you publicly announce it contents 

earlier, we plan no further distribution of this report until 30 days after its 

issue date. At that time, we will send copies of this report to the Secretary 

of Labor, Secretary of the Treasury, and Secretary of State. 

Page 55 GAO-09-642 Private Pensions
 

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-7215. Contact points for our offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix IV. 

Sincerely yours, 

Barbara Bovbjerg 

Director, Education, Workforce, 

 and Income Security 

Page 56 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To identify key risks workers face from traditional defined benefit (DB) 

and defined contribution (DC) plans, we reviewed the relevant research 

and interviewed industry experts, pension consulting firms, academics, 

and other relevant organizations. The scope of this study is limited to risks 

workers face that are directly related to their pension benefits and does 

not focus on other significant but more indirect risks to retirement 

security, such as retiree health care costs. In addition, while we also 

acknowledge the importance of analyzing risks facing certain 

subpopulations, such as specific minority groups, the study does not 

include specific discussions of such subpopulations. There was broad 

consensus among those we interviewed that we correctly identified the 

key risks that workers face, within the scope of our study. We developed a 

framework for analysis based on the key risks we identified and applied it 

when conducting our analysis for the second and third research questions. 

To identify approaches used in other countries that could address risks in 

the U.S. pension system and the trade-offs they entail, we examined the 

employer-sponsored pension systems of three countries: the Netherlands, 

Switzerland, and the United Kingdom. We selected these countries after 

completing an initial review of employer-sponsored pension plan designs 

in Organisation for Economic Co-operation and Development (OECD) 

countries. We focused on OECD countries in order to increase our 

opportunity to identify practices used in countries with well-developed 

capital markets and regulatory regimes comparable, if not always similar, 

to the United States. We acknowledge that there may be relevant plan 

design features from a non-OECD country that we did not address in this 

report. We identified 13 OECD countries based on interviews with pension 

experts, including the OECD, and our review of retirement-related 

research. We then examined the key pension plan design features of each 

of the 13 country’s private pension systems and selected 3 based on the 

following criteria: 

• The private pension system was identified through our research and the 

consensus of external experts as having strong potential for yielding 

useful lessons for the U.S. experience. 

• The private pension system is an important pillar of the country’s 

retirement system. 

• The private pension system directly addresses the risks identified in the 

first research question. The selected countries as a group address all of 

our key risk areas, although no single country was required to address all 

of them. 

Page 57 GAO-09-642 Private Pensions 
Appendix I: Scope and Methodology 

• The private pension system is not duplicative. Where similar plans exist in 

multiple countries, we chose the one that best addresses the other 

selection criteria and provided travel efficiencies for the job. 

To identify the approaches used in the employer-sponsored pension 

systems of the Netherlands, Switzerland, and the United Kingdom we 

analyzed how each country’s plan design addresses the risks that workers 

face, using the risk framework developed in the first research question. 

Although we did not independently analyze each country’s laws and 

regulations, we collected information about each country’s plan design 

and identified potential lessons for the United States by reviewing 

available documentation and research and interviewing pension experts 

and government officials in each country. We recognize that some of the 

design details are still being developed for the United Kingdom’s new 

system, scheduled to be implemented in 2012. We also interviewed 

academics and other experts based in the United States about each plan’s 

strengths and weaknesses, the trade-offs it entails, and potential lessons it 

could provide for the United States. In addition, our analysis recognized 

that the applicability of lessons learned from these countries’ plan designs 

is shaped by the public retirement systems and other social welfare 

supports in each country and we considered these contextual differences. 

To identify the approaches that key proposals for alternative pension plan 

designs in the United States use to address the risks that workers face, we 

analyzed four domestic proposals against the risk framework developed in 

the first research question. We selected the four proposals from a larger 

group that we identified by reviewing retirement-related research and 

conducting interviews with pension consulting firms, national experts, and 

other relevant organizations. We assessed the group against the following 

selection criteria and selected those proposals that met each of them: 

• The proposal has been identified through our research and the consensus 

of external experts as a major proposal. 

• The proposal directly addresses the risks identified in the first research 

question; the selected proposals as a group address all the major risk 

areas, although no single proposal was required to address all of them. 

• The proposal is from a source that GAO and external experts judge to be 

credible, such as universities and policy research organizations with 

demonstrated expertise in retirement issues. 

Page 58 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

• The proposal is presented as a formal proposal, as opposed to a partial or 

preliminary reform idea. 

• The proposal is current (i.e., proposed or considered in the last 5 years 

and not already adopted for use in the United States). 

• The proposal is not duplicative. When similar proposals were identified, 

we selected the one that best addressed the other selection criteria. 

We reviewed each proposal in its entirety and interviewed each of the 

authors to determine how the proposal addresses the risks areas we 

identified. Our review of the proposals focuses primarily on their 

approaches to address risks, although each proposal includes additional 

information that is beyond the scope of our report. We also clarified 

certain information about each proposal during interviews with the 

authors, including its trade-offs and the legal or administrative changes it 

would require. We also reviewed related research about the general 

approaches used in the proposals and interviewed national retirement 

policy experts about these approaches. In addition, we assessed two other 

proposals that specifically focused on increasing the use of annuities. We 

reviewed each of those proposals in their entirety and interviewed their 

authors to clarify details of those proposals. 

To analyze how certain options for pension reform may affect coverage 

and benefits, we used the Policy Simulation Group’s (PSG) 

microsimulation models to run various simulations of workers saving in 

DC plans over a career. The PSG Pension Simulator (PENSIM) is a pension 

policy simulation model that has been developed for the Department of 

Labor to analyze lifetime coverage and adequacy issues related to 

employer-sponsored pensions in the United States. It has been used by 

GAO, the Department of Labor, other government agencies, and private 

organizations to analyze lifetime coverage and adequacy issues related to 

employer-sponsored pensions in the United States1

 We projected account 

balances at retirement for PENSIM-generated workers under different 

scenarios representing different pension features and market assumptions. 

These features are used in some of the proposals we reviewed but do not 

 

1

 See, for example, GAO, Private Pensions: Low Defined Contribution Plan Savings May 

Pose Challenges to Retirement Security, Especially for Many Low-Income Workers, 

GAO-08-8 (Washington, D.C.: Nov. 29, 2007) and Private Pensions: Information on Cash 

Balance Pension Plans, GAO-06-42 (Washington, D.C.: Nov. 3, 2005). 

Page 59 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

represent any proposal in its entirety. See below for further discussion of 

PENSIM and our assumptions and methodologies. 

Methodology and 

Assumptions Using 

PENSIM Microsimulation 

Model 

To project lifetime savings in DC pensions and to identify the effects of 

certain changes in policies, we used PENSIM.2

 PENSIM is a dynamic 

microsimulation model that produces life histories for a sample of 

individuals born in the same year.3

 The life history for a sample individual 

includes different life events, such as birth, schooling events, marriage and 

divorce, childbirth, immigration and emigration, disability onset and 

recovery, and death. In addition, a simulated life history includes a 

complete employment record for each individual, including each job’s 

starting date, job characteristics, pension coverage and plan 

characteristics, and ending date. The model has been developed by PSG 

since 1997 with funding and input by the Office of Policy and Research at 

the Employee Benefits Security Administration (EBSA) of the U.S. 

Department of Labor with recommendations of the National Research 

Council panel on retirement income modeling. 

PENSIM simulates the timing for each life event by using data from 

various longitudinal data sets to estimate a waiting-time model (often 

called a hazard function model) using standard survival analysis methods. 

PENSIM incorporates many such estimated waiting-time models into a 

single dynamic simulation model. This model can be used to simulate a 

synthetic sample of complete life histories. PENSIM employs continuoustime, discrete-event simulation techniques, such that life events do not 

have to occur at discrete intervals, such as annually on a person’s 

birthday. PENSIM also uses simulated data generated by another PSG 

simulation model, SSASIM, which produces simulated macro-demographic 

and macroeconomic variables. 

PENSIM imputes pension characteristics using a model estimated with 

1996 to 1998 establishment data from the Bureau of Labor Statistics 

Employee Benefits Survey (now known as the National Compensation 

 

2

For more information on PSG microsimulation models, see http://www.polsim.com. For 

more details on PENSIM, see Martin Holmer, Asa Janney, and Bob Cohen, PENSIM 

Overview, available from http://www.polsim.com/overview.pdf. 

3

While these models use sample data, our report, like others using these models, does not 

address the issue of sampling errors. The results of the analysis reflect outcomes for 

individuals in the simulated populations and do not attempt to estimate outcomes for an 

actual population. 

Page 60 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

Survey, or NCS). Pension offerings are calibrated to historical trends in 

pension offerings from 1975 to 2005, including plan mix, types of plans, 

and employer matching. Further, PENSIM incorporates data from the 

1996-1998 Employee Benefits Survey to impute access to and participation 

rates in DC plans in which the employer makes no contribution, which the 

Bureau of Labor Statistics does not report as pension plans in the NCS. 

The inclusion of these “zero-matching” plans enhances PENSIM’s ability to 

accurately reflect the universe of pension plans offered by employers. The 

baseline PENSIM assumption, which we adopted in our analysis, is that 

2005 pension offerings, included the imputed zero-matching plans, are 

projected forward in time. 

PSG has conducted validation checks of PENSIM’s simulated life histories 

against both historical life history statistics and other projections. 

Different life history statistics have been validated against data from the 

Survey of Income and Program Participation (SIPP), the Current 

Population Survey (CPS), Modeling Income in the Near Term (MINT3), the 

Panel Study of Income Dynamics (PSID), and the Social Security 

Administration’s Trustees Report. PSG reports that PENSIM life histories 

have produced similar annual population, taxable earnings, and disability 

benefits for the years 2000 to 2080 as those produced by the Congressional 

Budget Office’s long-term social security model (CBOLT) and as shown in 

the Social Security Administration’s 2004 Trustees Report. According to 

PSG, PENSIM generates simulated DC plan participation rates and 

account balances that are similar to those observed in a variety of data 

sets. For example, measures of central tendency in the simulated 

distribution of DC account balances among employed individuals is similar 

to those produced by an analysis of the Employee Benefit Research 

Institute-Investment Company Institute 401(k) database and of the 2004 

Survey of Consumer Finances. GAO performed no independent validation 

checks of PENSIM’s life histories or pension characteristics. 

In 2006, EBSA submitted PENSIM to a peer review by three economists. 

The economists’ overall reviews ranged from highly favorable to highly 

critical. While the economist who gave PENSIM a favorable review 

expressed a “high degree of confidence” in the model, the one who 

criticized it focused on PENSIM’s reduced form modeling. This means that 

the model is grounded in previously observed statistical relationships 

among individuals’ characteristics, circumstances, and behaviors, rather 

than on any underlying theory of the determinants of behaviors, such as 

the common economic theory that individuals make rational choices as 

their preferences dictate and thereby maximize their own welfare. The 

reduced form modeling approach is used in pension microsimulation 

Page 61 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

models and the feasibility of using a nonreduced-form approach to build 

such a model may be questionable given the current state of economic 

research. The third reviewer raised questions about specific modeling 

assumptions and possible overlooked indirect effects. 

Assumptions Used in 

Projecting DC Plan 

Balances at Retirement 

PENSIM allows the user to alter one or more inputs to represent changes 

in government policy, market assumptions, or personal behavioral choices 

and analyze the subsequent impact on pension benefits. Starting with a 2 

percent sample of a 1990 cohort, totaling 126,518 people at birth, our 

baseline simulation includes some of the following key assumptions and 

features. For our report, we focus exclusively on accumulated balances in 

DC plans and ignore any benefits an individual might receive from DB 

plans or from Social Security. Our reported benefits therefore capture just 

one source of potential income available to a retiree. 

• Workers accumulate DC pension benefits from past jobs in one rollover 

account, which continues to receive investment returns, along with any 

benefits from a current job. At retirement, these are combined into one 

account. Because we focus on DC plan balances only, we do not track 

Social Security benefits or benefits from DB plans. 

• Plan participants invest all assets in their account in life cycle funds, 

which adjust the mix of assets between stocks and government bonds as 

the individual ages. Stocks return an annual non-stochastic real rate of 

return of 2.9 percent, equivalent to the government bond rate. In an 

alternate simulation, we assume that stocks earn an annual non-stochastic 

real rate of return of 4.9 percent and find similar effects for each policy 

option (see table 13).4

 Using different rates of return reflect assumptions 

used by the Social Security Administration’s Office of the Chief Actuary in 

some of its analyses of trust fund investment. 

 

4

The difference between the return on equities and Treasury bonds represents the 

compensation that individuals require for the higher risk of holding equities. Since our 

projections do not stochastically model stock returns, assuming a rate of return on assets 

equal to the historical return on stocks does not capture the risks associated with stock 

returns; we therefore also model DC savings under a scenario in which all assets return the 

government bond rate of return. Using the government bond rate of return, we find similar 

results for the relative impact of each policy option. For more discussion of the appropriate 

rate to use in projections, see “Analysis of H.R. 3304, Growing Real Ownership for Workers 

Act of 2005,” Congressional Budget Office, September 13, 2005, 63-65. 

Page 62 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

Table 13: Projected Average Household Annuity Equivalents and Projected 

Percentage of Workers with DC Savings at Retirement, by Income, under Different 

Scenarios 

By income quartile 

Baseline results Overall 1 2 3 4

Household annuity equivalent (per 

year, 2008 dollars) 

$18,081 $3,351 $9,344 $19,397 $40,231

Percentage of workers with DC 

savings at retirement 

67.1% 47.6% 64.8% 74.5% 81.5%

Universal access 

Household annuity equivalent (per 

year, 2008 dollars) 

$20,228 $3,882 $10,686 $22,031 $44,311

Percentage of workers with DC 

savings at retirement 

79.4% 63.2% 78.6% 86.0% 90.0%

Universal access with auto-enrollment

Household annuity equivalent (per 

year, 2008 dollars) 

$22,087 $4,773 $12,305 $24,206 $47,065

Percentage of workers with DC 

savings at retirement 

90.7% 84.4% 90.5% 93.2% 94.7%

Universal access with mandatory participation

Household annuity equivalent (per 

year, 2008 dollars) 

$25,672 $6,354 $15,028 $28,166 $53,137

Percentage of workers with DC 

savings at retirementa

96.7% 95.7% 96.6% 97.1% 97.3%

Source: GAO calculations of PENSIM simulation. 

Note: Model assumptions include the following: (1) workers use all accumulated DC plan balances to 

purchase an inflation-adjusted annuity at retirement, between ages 62 and 70; couples separately 

purchase individual life annuities which are added together for the household annuity equivalent; (2) 

workers invest all plan assets in life cycle funds; (3) stocks earn an average annual 4.9 percent real 

return, except where specified. Quartiles are based on the distribution of lifetime earnings. No default 

or minimum contribution rates were specifically defined for the three scenarios, rather the contribution 

rates are produced by PENSIM in the same manner as they are for those who voluntarily participate 

in the baseline scenario. We have no evidence on what contribution rates new participants would 

choose under the three scenarios we analyzed, but it may be lower than the contribution rates chosen 

by those that voluntarily participate in the baseline scenario. 

a

Our modeling assumptions do not alter current standards for eligibility. Thus, under universal access 

with mandatory participation some workers, such as part-time workers who work less than 1,000 

hours a year, may not be eligible for pension coverage according to plan provisions. 

Page 63 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

• Workers purchase a single, inflation-adjusted life annuity, typically at 

retirement, which occurs between the ages of 62 and 70.5

 Anyone who 

becomes permanently disabled at age 45 or older also purchases an 

immediate annuity at their disability age.6

 We eliminate from the sample 

cohort members who: (1) die before they retire, at whatever age; (2) 

immigrate into the cohort at an age older than 25; (3) emigrate prior to 

retirement; or (4) become permanently disabled prior to age 45.7

Starting from this baseline model, we vary key inputs and assumptions to 

see how these variations affect pension coverage and benefits at 

retirement. Scenarios we analyzed include: 

1. Universal access. Existing employer plans stay as they are in the 

baseline simulation, but all employers that did not sponsor a plan are 

required to provide a DC plan with no employer contribution. 

Participation and employee contributions for those who newly have 

access are based on current model assumptions regarding 

participation in employer-sponsored DC plans with no employer 

contribution. 

2. Universal access with automatic enrollment. In addition to universal 

access, as described above, all DC plans have automatic enrollment 

where individuals must affirmatively opt out of participating in the 

plan. 

3. Universal access with mandatory participation. In addition to universal 

access, all workers with access to a DC plan are required to participate 

(i.e., no opt out). 

 

5

Annuity equivalents are calculated by converting DC-derived account balances at 

retirement into inflation-indexed retirement annuity payments using annuity prices that are 

based on projected mortality rates for the 1990 birth cohort and annuity price loading 

factors that ensure that the cost of providing these annuities equals the revenue generated 

by selling them at those prices. 

6

We classify as retired those workers who become disabled after age 62. We do not classify 

as disabled those workers who recover from a disability prior to age 62. 

7

We drop cohort members who die before retiring because we assume annuitizaton at 

retirement, but someone who dies before retiring would never annuitize his DC savings. We 

apply the other conditions because such cohort members are likely to have fewer years in 

the workforce to accumulate DC plan savings. 

Page 64 GAO-09-642 Private Pensions
Appendix I: Scope and Methodology 

PENSIM Cohort Summary 

and Cross-Sectional 

Statistics 

Lifetime summary statistics of the simulated 1990 cohort’s workforce and 

demographic variables give some insight into the model’s projected DC 

benefits at retirement that we report (see table 14). By restricting the 

sample to those who have some earnings, do not immigrate into the cohort 

after age 25, emigrate prior to retirement, and retire (or become disabled 

at age 45 or older), we reduce the full sample of 126,518 individuals to a 

sample of 66,859 individuals. 

Table 14: Sample Summary Statistics, PENSIM 1990 Cohort, Medians 

By income quartile 

Demographic and 

workforce variables 

Sample 

(n = 

66,859) 1 2 3 4 

Percentage female 

(average) 

52 64 54 49 41 

Education Some 

college 

High school 

graduate 

High school 

graduate 

Some 

college 

College 

degree 

Years working full 

time 

29.8 20.2 29.1 31.4 34.0 

Years working part 

time 

2.2 6.3 2.4 1.5 0.8 

Steady earnings 

(annual, 2008 

dollars) 

$46,838 $20,070 $40,071 $65,508 $124,510 

Number of jobs over 

lifetime 

5 5 5 5 5 

Duration of longest 

job, years 

17.4 14.7 17.3 18.2 19.1 

Retirement age 63 63 63 63 63 

Years eligible for a 

DC plan 

18.8 11.3 17.8 21 24.1 

Source: GAO calculations of PENSIM simulation. 

Page 65 GAO-09-642 Private Pensions
Appendix

Pens

Netherlands,

 II: Examples from Private Sector 

ion Systems in the United Kingdom, the 

 and Switzerland 

Page 66 GAO-09-642 

Appendix II: Examples from Private Sector 

Pension Systems in the United Kingdom, the 

Netherlands, and Switzerland 

This example is based on the Personal Accounts plan, a type of DC plan. 

Key design features of the Personal Accounts plan include: automatic 

enrollment, mandatory minimum contributions, default investment 

allocations, and annuities with a lump-sum option. 

Example of How a Worker 

Accumulates Pension 

Benefits in the United 

Kingdom 

• A 22-year-old worker takes a job with a small employer that does not have 

its own pension plan. The employer automatically enrolls the worker into 

a Personal Accounts plan. The worker chooses not to opt out of the plan. 

• For the specified earnings band, the employer deducts 4 percent of the 

worker’s earnings from her paycheck and deposits them into her Personal 

Accounts plan because the worker has chosen not to contribute more than 

the mandatory minimum amount. The employer also makes its mandatory 

minimum contribution equal to 3 percent of the worker’s earnings into her 

account. The government also effectively contributes an amount equal to 1 

percent of the worker’s pay into her account through normal tax relief. 

• The worker does not make an active investment allocation so all 

contributions are invested into the default option. 

• Over the course of her career, the worker’s benefits accumulate. She 

experiences investment gains and losses; the actual amount of the 

worker’s contributions increase as her salary increases (although the 4 

percent contribution rate remains the same); the worker changes 

employers but keeps the same Personal Accounts plan and she and the 

new employer continue to contribute to it. The worker does not withdraw 

any of the accumulated benefits until she retires. 

• At age 65 the worker retires and has accumulated a retirement nest egg 

equal to the total contributions and investment earnings less investment 

losses and fees. The worker takes a lump-sum distribution equal to 25 

percent of her account balance and annuitizes the remaining 75 percent. 

The annuity provides the worker with a monthly pension benefit for the 

rest of her life. 

Example of a How a 

Worker Accumulates 

Pension Benefits in the 

Netherlands 

This example is based on a typical career-average DB plan in the 

Netherlands which is negotiated between workers and employers. Key 

plan design features include: mandatory industry plan, contribution levels 

specified in the labor contract for this particular plan, pooled investments, 

conditional indexation in good and bad years, portability, and 

annuitization with conditional indexation. 

Private Pensions 
Appendix II: Examples from Private Sector 

Pension Systems in the United Kingdom, the 

Netherlands, and Switzerland 

• A 25-year-old worker starts a job in an industry with a mandatory pension 

plan and becomes enrolled in the plan. 

• The worker and employer contribute to the plan in the amounts specified 

in the industry plan’s agreement. Contributions for this specific industry 

plan (as negotiated by the worker and employer representatives) are: 

worker 5 percent of pay (one-fourth of total contribution); employer 15 

percent of pay (three-fourths of total contribution) for a total of 20 percent 

of the worker’s pay. 

• All the contributions to the plan are combined into a single pool and 

invested collectively. The pension fund’s board decides how to invest the 

contributions. 

• The worker accrues benefits at the rate of 2 percent of earnings each year 

according to the plan rules negotiated by worker and employer 

representatives. 

• In years when the plan is sufficiently funded (e.g., when investment 

returns are high), accrued benefits are indexed (i.e., adjusted upward to 

reflect price and wage increases) in accordance with this particular plan’s 

rules; in years when the plan is not sufficiently funded (e.g., investment 

returns are low), accrued benefits are partially indexed or not indexed at 

all. 

• Over the course of his career, the worker changes jobs but stays in the 

same pension plan because the jobs are all in the same industry. The new 

employer now contributes to the plan. 

• At age 65, the worker retires and has accrued pension benefits equal to 2 

percent of his annual earnings multiplied by 40 years, with adjustments 

made for indexation. The accumulated benefits are paid out as an annuity 

that provides him with a monthly benefit for the rest of his life. As long as 

the plan is sufficiently funded, the annuity payments will be indexed (i.e., 

adjusted upward to reflect price and wage increases). 

Example of How a Worker 

Accumulates Pension 

Benefits in Switzerland 

This example is based on a typical DB cash balance plan that meets the 

mandatory minimum requirements under Swiss law. Key features of the 

plan design include: mandatory coverage, mandatory minimum 

contributions that vary with age, minimum guaranteed returns on 

investment, full portability, annuitization of pension benefits at the 

mandatory minimum conversion rate, and a lump-sum option for drawing 

down benefits in retirement. 

Page 67 GAO-09-642 Private Pensions
Appendix II: Examples from Private Sector 

Pension Systems in the United Kingdom, the 

Netherlands, and Switzerland 

• A 25-year-old worker starts a job with an employer that provides a pension 

plan which meets the mandatory minimum standards under Swiss law and 

becomes enrolled in the plan. 

• For the specified earnings band, the worker and employer contribute an 

amount equal to 7 percent of pay to the plan, the minimum amount 

required by law for a 25-year-old worker. Because the employer is required 

by law to make at least half of the contribution, it contributes 3.5 percent 

and the worker contributes the other 3.5 percent by payroll deduction. The 

amount of the mandatory minimum required contribution will increase 

with the worker’s age in accordance with the schedule below. 

• Ages 25-34: 7 percent of pay 

• Ages 35-44: 10 percent of pay 

• Ages 45-54: 15 percent of pay 

• Ages 55-65: 18 percent of pay 

• All the contributions to the plan are combined into a single pool and 

invested collectively. The pension fund’s board decides how to invest the 

contributions within the guidelines established by the government. 

• The worker accrues benefits based on the amount of the contributions and 

the investment returns. This particular pension plan provides the 

minimum return on investment guaranteed by law. The mandatory 

minimum return is 2 percent this year, but was higher in past years and 

may vary in future years. 

• Over the course of his career, the worker changes jobs and the value of his 

accumulated benefits is calculated each time and transferred to his new 

employers’ pension plans. 

• The worker retires at age 65 and has accumulated a retirement nest egg. 

Although he has the opportunity to take 25 percent of his nest egg as a 

lump sum he chooses to annuitize the entire amount. He also had the 

opportunity to withdraw funds prior to retiring when he bought his first 

home; he choose not to, and the nest egg equals the total value of all 

contributions made and the minimum investment returns guaranteed each 

year. The accumulated benefits are paid out as an annuity that provides 

him with a monthly benefit for the rest of his life. Each year his total 

benefits equal 7 percent of the total nest egg, in accordance with the 

mandatory minimum annuity conversion rate. In years when the pension 

plan’s funding levels are sufficient, his pension benefits will also be 

indexed for inflation (i.e., adjusted upward). 

Page 68 GAO-09-642 Private Pensions
Appendix III: Summary of Administrative and 

Legal Changes Associated with Key Domestic Appendix III: Summary of Administrative and Proposals 

Legal Changes Associated with Key Domestic 

Proposals 

Table 15: Administrative and Legal Changes Associated with Key Domestic Proposals for Alternative Pension Plan Designs 

Proposal Administrative and legal changes 

Super Simple Saving Plan • Employers not subject to annual nondiscrimination testing or reporting requirements; 

contribution levels monitored and enforced through the tax system. 

• Government matching contributions replace the Saver’s Credit, but the authors leave 

the design of the match open for discussion. Match deposited directly in accounts 

through the tax system under a separate record-keeping system maintained by 

financial service providers; workers would not have to file taxes to receive the match. 

• Workers allowed to make higher contributions than under standard 401(k) plans. 

Maximum combined contribution from the employer and worker together is $46,000. 

• All standard 403(b), SIMPLE, and Safe Harbor plans required to convert to Super 

Simples. Existing 401(k) plans grandfathered in, but 401(k) plan sponsors could 

adopt the Super Simple by amending their plans. 

A New Benefit Platform for Life Security • Establish a centralized system of third-party Benefit Administrators in the private 

sector. Federal government establishes uniform service areas throughout the country 

for each of the plan’s core benefits (retirement and health care); two or more Benefit 

Administrators would be available to every employer and individual worker. 

• Federal government establishes, or arranges for, a uniform national regulatory 

structure and uniform standards for the benefits included in the plan. 

• Current nondiscrimination rules would be replaced with simplified standards, 

including “safe harbor” designs. 

• Benefit Administrators will assume liability deemed appropriate for the benefits they 

provide but employers would still have some responsibility for monitoring the plan. 

Universal 401(k) Plan • Federal government establishes a federally chartered clearinghouse structure that 

sets-up and manages workers’ accounts. 

• Saver’s Credit made refundable and directly deposited into workers’ accounts; 

Internal Revenue Service forwards the government match to individual accounts and 

reconciles workers’ and employers’ contributions with tax records. Workers receive 

the credit regardless of their tax liability; expanded on a sliding scale so that workers 

at higher income levels also receive government contributions. 

• Federal government facilitates annuity purchases, either by contracting with one or 

more private sector insurers or by managing the annuity payments through the 

Pension Benefit Guaranty Corporation. 

Guaranteed Retirement Accounts Plan • Federal government (Social Security Administration) establishes and administers a 

system of retirement savings accounts and manages and invests plan assets (Thrift 

Savings Plan or similar body) and guarantees a specified rate of return on the 

savings accounts. 

• Tax preferences for defined contribution plans, such as 401(k) plans and Individual 

Retirement Accounts are reduced and replaced by a uniform tax credit; tax-qualified 

contributions to DC plans would be reduced to $5,000 per year, adjusted for inflation.

• State and local governments have to notify the federal government of marriages and 

divorces so that contributions can be apportioned evenly between husbands and 

wives. 

• State governments have to report who is receiving unemployment benefits to the 

federal government (Internal Revenue Service) so that those workers can receive the 

$600 tax credit. 

Source: GAO analysis of key domestic proposals for alternative pension plan designs. 

Page 69 GAO-09-642 Private Pensions 
Appendix IV: GAO Contact and Staff Appendix IV: GAO Contact and Staff Acknowledgments 

Acknowledgments 

Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov

In addition to the contact named above, Charles Jeszeck, Acting Director; 

Michael Collins, Assistant Director; Sharon Hermes and Annamarie 

Lopata, Analysts-in Charge; Meghan Hardy; Susan Aschoff; Seyda 

Wentworth; Joseph Applebaum; and Craig Winslow made key 

contributions to this report. 

GAO Contact 

Staff 

Acknowledgments 

Page 70 GAO-09-642 Private Pensions
Related GAO Products Related GAO Products 

Defined Benefit Plans: Proposed Plan Buyouts by Financial Firms Pose 

Potential Risks and Benefits. GAO-09-207. Washington, D.C.: March 16, 

2009. 

Private Pensions: Low Defined Contribution Plan Savings May Pose 

Challenges to Retirement Security, Especially for Many Low-Income 

Workers. GAO-08-08. Washington, D.C.: November 29, 2007. 

Private Pensions: Changes Needed to Provide 401(k) Plan Participants 

and the Department of Labor Better Information on Fees. GAO-07-21. 

Washington, D.C.: November 16, 2006. 

Private Pensions: Information on Cash Balance Pension Plans.

GAO-06-42. Washington, D.C.: November 3, 2005. 

Highlights of a GAO Forum: The Future of the Defined Benefit System 

and the Pension Benefit Guaranty Corporation. GAO-05-578SP. 

Washington: D.C.: June 1, 2005. 

Private Pensions: Implications of Conversions to Cash Balance Plans. 

GAO/HEHS-00-185. Washington, D.C.: September 29, 2000. 

Cash Balance Plans: Implications for Retirement Income. 

GAO/HEHS-00-207. Washington, D.C.: September 29, 2000. 

(130874) Page 71 GAO-09-642 Private Pensions
GAO’s Mission The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday afternoon, GAO 

posts on its Web site newly released reports, testimony, and 

correspondence. To have GAO e-mail you a list of newly posted products, 

go to www.gao.gov and select “E-mail Updates.” 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s Web site, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information. 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, DC 20548 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Public Affairs 

Please Print on Recycled Paper