The Super Simple Plan

The Super Simple Plan*
Pamela Perun, Retirement Income Consultant, and C. Eugene Steuerle, Institute Fellow and Richard B. Fisher Chair, Urban Institute

The goal: To increase availability of retirement plans and adequacy of retirement savings significantly and to simplify the private pension system

The method:  Includes a set of employer incentives to adopt or transform their 401(k) plans into a simpler, more equitable structure or adopt a hybrid defined benefit (cash balance) plan with a required minimum level of contribution for all employees.  All contributions accumulate, are portable and are largely dedicated to retirement income. In return for minimum employer contributions, non-discrimination rules and other plan compliance rules are eased while limits on employee contributions are increased

The models:  Existing SIMPLE plans (U.S.) but expanded to apply to employers of all sizes; British NEST retirement saving reform program

The incentives for adopting a Super Simple:

• Larger Savers Credit
• Over time, higher contribution limits than with a standard 401(k) plan
• Vastly simplified discrimination rules; in return for a base employer contribution for all employees, no non-discrimination testing, no annual reporting
• Elimination of distinction between employer and employee contributions when calculating annual account contribution limits
• Employer and government matching money restricted for retirement.  This practical approach follows past Congressional tendencies toward more liberal treatment of employee but not government and employer money; government subsidy not meant for current consumption.

Small business advantages:

• No mandate, so firms can choose to adopt a Super Simple when ready
• Like SIMPLE plans, minimal,  low cost plan administration
• Business owners can contribute more on their own behalf than in a 401(k), SIMPLE plan or IRA as long as employees are covered and get a minimum contribution

Employee, employer and government contributions:

• All but very short-term employees must be covered
• A minimum employer contribution (e.g. 4 percent), exempt from payroll taxes
• A minimum employee contribution in an opt-out design and perhaps auto-escalation (e.g., 3 percent, or 2 percent minimum contribution escalating with years in firm)
• A maximum dollar limit on contributions
• Savers Credit of 1 percent up to some amount, say, $20,000—money to go into plan solution, not a tax refund that can be consumed
• Employer plus employee contributions plus Savers Credit add up in this example to a between 7 & 8 percent annual contribution for lower-income workers

Compared to other plans: Standard 401(k) plans still available, but over time their contribution limits would be less generous than in the Super Simple and they would receive none of the new, better incentives

Integration with other plan types and features:

• Dynamic pension plans, such as cash balance plans, fit easily into this structure
• Most firms with good defined contribution plans  or cash balance pension plans could easily qualify as Super Simple plans
• Other features such as annuity requirements, spousal consent rules, QDIA investment options could be added to give the Super Simple more db-like features

*The full paper is available at http://www.urban.org/publications/411676.html. This summary also adds discussion of integration possibilities & adaptability to new features such as auto-escalation.