Defined Contribution Plan with Embedded Defined Benefit Account
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Solution Overview
Problem
The increasing life expectancy and changing workforce dynamics have led to a shortfall in Social Security benefits, and the decline of defined benefit pension plans has left many workers without guaranteed retirement income, prompting a need for a portable and secure retirement investment vehicle that provides a minimum guaranteed income and potential for growth.
Innovation Solution
A system and method that integrate a defined benefit account within a defined contribution plan, allowing for guaranteed minimum periodic retirement income payments, with the option to increase payments based on investment performance, and the flexibility to withdraw or reinvest funds, ensuring portability and security.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If Social Security payroll taxes are increased to fund old age benefits, then the trust fund can remain fully funded, but the tax burden on employees and employers increases significantly
Solution Approach 1:
The patent segments retirement funding into multiple sources: Social Security benefits, employer contributions to defined contribution plans, and employee contributions. This diversifies the funding structure so that reliance on any single source (including payroll taxes) is reduced, addressing the trust fund solvency issue without requiring excessive tax increases on any one group.
Solution Approach 2:
The patent introduces defined contribution plans with guaranteed minimum retirement income as an intermediary between Social Security and private retirement savings. This intermediary layer provides additional retirement income support without requiring direct increases in Social Security payroll taxes, thereby reducing the tax burden while maintaining trust fund solvency.
2Ease of manufacture
If defined benefit pension plans are eliminated to reduce employer costs, then employer expenses decrease, but workers lose guaranteed retirement income
Solution Approach 1:
The patent changes the structure of retirement plans from traditional defined benefit models to defined contribution models with guaranteed minimum retirement income. This parameter change allows employers to contribute fixed amounts to employee accounts while maintaining a guarantee of minimum retirement income, thereby reducing employer costs while preserving retirement income security for workers.
Solution Approach 2:
The patent creates a dynamic retirement funding system where employees can adjust their investment choices and contribution levels within the defined contribution plan framework. This flexibility allows the system to adapt to changing economic conditions and employer cost constraints while maintaining the guaranteed minimum retirement income benefit for workers.
3Adaptability or versatility
If employees change jobs frequently to adapt to workforce dynamics, then career mobility increases, but retirement benefits are lost due to non-portability
Solution Approach 1:
The patent creates a universal retirement account structure within defined contribution plans that can be maintained and transferred across different employers. The account accumulates employer and employee contributions along with investment growth, and this portable account structure allows employees to retain their retirement savings when changing jobs, thereby supporting career mobility while maintaining benefit retention.
4Device complexity
If workers rely solely on Social Security benefits for retirement income, then the retirement system remains simple, but benefits are insufficient to maintain desired comfort levels
Solution Approach 1:
The patent merges Social Security benefits with defined contribution plans featuring guaranteed minimum retirement income to create a hybrid retirement system. This combination allows workers to receive both Social Security benefits and additional retirement income from their defined contribution accounts, thereby increasing overall retirement income adequacy while maintaining a relatively simple two-component system structure.
Data Source
AI summary
A system and method comprises a defined contribution module for periodically receiving contributions and for accumulating value over a period of time by investing at least one of the contributions, the accumulated value being capable of: (1) being withdrawn at any time and reinvested, and (2) being paid out after a predetermined period of time; and wherein select investment options comprises investment products and at least one designated defined benefit investment option module for: (1) receiving at least one investment payment from the defined contribution module, the investment payment comprising at least one of the contributions and/or the accumulated value, (2) for paying out a guaranteed minimum income payment for life, after the predetermined period of time, based on a retirement income formula, and (3) increasing the income payment for life for excess performance over the formula.