The phrase “pension benefits” may come up a lot in the next several days as negotiations between the United Auto Workers union and the Big Three automakers go down to the wire to avert a strike. But for most private-sector US workers, pensions disappeared long ago.
In a traditional pension, employers contribute, invest and manage retirement funds for their workers, who then receive guaranteed monthly checks for life after they retire. But over the past several decades, employers have either closed or frozen their pensions and turned instead to retirement savings vehicles like the 401(k), which put much more of the onus on workers to save, invest and manage their own money for retirement.
“We’ve shifted from a more paternalistic system to a do-it-yourself savings plan,” said Karen Friedman, executive director of the Pension Rights Center.
That’s not to say traditional pensions — also known as defined benefit (DB) plans — are completely dead, at least not when you look at the broad landscape of all US workers. But access to these benefits has dropped steeply and they are not likely to make a comeback.
The workers most likely to still have a DB plan are unionized workers in both the public sector (think federal, state and local government workers and teachers) and the private sector (e.g., autoworkers), as well as active-duty military members with at least 20 years of service.
Those least likely to have a defined benefit pension are non-unionized private-sector workers, which is to say most employed adults. In March 2022, for instance, only 7% of private industry nonunion employees were participating in defined benefit plans, according to the Bureau of Labor Statistics. By contrast, a majority of union workers in both the private and public sectors were active participants in one.
But not all unionized workers have equal access to their employer’s DB plan. One sticking point in the UAW negotiations is to restore access to company pension plans that had been closed to anyone hired after the union accepted deep concessions in its 2007 contract. That was back when General Motors and Chrysler were less than two years away from bankruptcy and federal bailouts.
To get a broad sense of how drastically the retirement savings landscape has changed, consider that there were 27.2 million active participants in private-sector DB plans in 1975, according to the Congressional Research Service, which relied on BLS data. By 2020, that number had dropped to 12 million. Meanwhile, the number of active participants in private-sector defined contribution (DC) plans like a 401(k) or profit-sharing plan soared from 11.2 million in 1975 to 85.3 million in 2020.
Key differences between a traditional pension and a 401(k)
With defined benefit pensions, the entire burden of saving and investing money for a worker’s retirement falls on the employer, although some DB plans now require employees to contribute some money as well.
And how much a person is paid every month in retirement from their pension is determined by a complicated formula usually based on salary and years of service.
A DC plan (such as a 401(k) or a profit-sharing plan) generally puts the burden of saving and investing on the employee, and the employer decides whether and how much to contribute to a worker’s account. That said, the vast majority of companies do offer matching contributions up to a certain percentage of an employee’s salary.
Then, once retired, those in DC plans have to decide how to invest their money and determine annually how much they can withdraw to ensure they don’t run out of money. They may also weigh whether it makes financial sense to buy an expensive annuity with some or all of their savings in order to get a guaranteed paycheck every month.
Many employers started making the shift to 401(k) plans and other DC plans in the 1980s.
One reason was cost: Committing to pay employees for the rest of their lives can be expensive and unpredictable.
“Cost played an important role, but cost certainty was also important. Under the DB plans, the costs necessary to fund the plan could change every year depending on rates of return in the markets and growing expected longevity,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. “Some years, no contributions would be necessary, whereas the next year they could be substantial.”
By contrast, he noted, DC plan costs are more predictable. “They have contributions and plan administration fees paid each year, but market changes [don’t] change what the company [is] required to pay.”
Plus, Copeland added, employers have more flexibility in how much they pay into worker’s accounts based on company profits.
Lastly, employees can take whatever money they have in their account when they change jobs — including the matching employer contributions that have vested. By contrast, if they cut their tenure short at a job with a DB plan, they risk being left with nothing if they haven’t reached the full vesting time of service required, Copeland said.
Still, for workers, he added, “the movement to DC plans increased the complexity of funding retirement.”
Defined benefit and defined contribution plans carry different risks for participants.
With traditional pensions, workers won’t get much for their service in retirement unless they stay with the same employer for a very long time. And even if they do, they may not get much out of the plan if they die soon after retiring, because not all plans let workers leave their pension to their families.
And should their employer decide to “de-risk” and sell their DB plan assets and liabilities to an insurance company, workers will still get their pension payments but those payments no longer enjoy the same federal protections, such as shielding them from creditors in the event a retiree runs into financial trouble, Friedman noted. And should the insurer go bankrupt, the plan won’t be backed by the federal Pension Benefit Guaranty Corp. The PBGC protects pension benefits and continues to pay retirees should their employer or its DB plan become insolvent. But if a plan is sold to an insurer, that protection is lost. Instead, state law will govern how retirees are treated.
The risks for employees in a defined contribution plan, meanwhile, are many. Workers may not save enough and so may be forced to live solely off their Social Security benefits, which are only intended to replace a portion of one’s pre-retirement income. They may not invest their money well or the markets may fall at just the wrong time — especially within five years of one’s retirement — thereby significantly reducing their nest egg. And if they take too much out of their accounts in retirement they risk running out of money before they die.
Simply having access to a workplace retirement plan isn’t enough to guarantee a secure retirement. Many workers may have access to a 401(k) plan but don’t make enough money to feel they can afford to contribute much — if anything.
A recent 401(k) report from Vanguard found that the median income of people with access to a plan but who did not participate was just $42,000, meaning half of nonparticipants made less than that.
“401(k)s aren’t really cutting it for most Americans,” said Friedman, who noted that the Pension Rights Center advocates for creating workplace retirement plans that combine the best of DB and DC plan features.
Meanwhile, another group of workers who may find themselves hard up in their older years are the roughly 30% of private-sector workers who don’t have access to either a DB or DC plan at work.
With the exception of some state-run savings programs intended to help them, these employees are on their own to cobble together funds to augment their Social Security benefits, with no help from their employers.
— CNN’s Chris Isidore contributed to this report.
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