The vanishing defined-benefit pension and its discontents
CHICAGO (Reuters) - If only we could revive the good old pension. You retire after 30 or 40 years at a company, get the gold watch, and the monthly checks start flowing.
Many Americans still get those checks, but Corporate America has been running away from defined-benefit (DB) pensions for decades, and many experts see that as a key cause of our retirement security crisis. Pensions provide a guaranteed lifetime income stream, while owners of 401(k)s and individual retirement accounts take on two impossible-to-control risks: stock market volatility and uncertainty about their own longevity.
But were traditional pensions ever really the golden goose of American retirement? And do workers really value them as highly as policy gurus think they should? Those provocative questions were debated last week at a gathering of top retirement policy experts from around the world sponsored by the Pension Research Council at the Wharton School of the University of Pennsylvania.
The event, called "Reimagining Pensions: The Next 40 Years," marked the 40th anniversary of the passage of the Employee Retirement Income Security Act (ERISA), the law that governs U.S. private-sector retirement plans. Speakers examined the health of the U.S. retirement system and considered what the system will - or should - look like in the years ahead.
Right now, we're on rocky ground. Half of all U.S. households won't be able to maintain their standard of living in retirement, according to by the Center for Retirement Research at Boston College (CRR). Rising longevity, rising healthcare costs and declining income replacement rates from Social Security are all factors.
CRR researchers also pointed to the decline of defined-benefit pensions as a destabilizer of retirement security, but that contention drew some fire at Wharton. While DB pensions do a good job for workers who stay at a job for many years, they were never a good solution for those who shift jobs frequently, since pensions aren't portable, argued Dallas Salisbury, president of the Employee Benefit Research Institute
Under ERISA, employers can require that employees have five years of service to become 100 percent vested, or longer periods with gradual vesting. Yet an EBRI analysis finds that median tenure for male workers age 55 to 64 topped out at 15.3 years in 1983, and slid to 10.7 years in 2012. For female workers in that
age group, the figure has remained more stable, around 10 years.
"Contrary to some folklore, most U.S. workers have always changed jobs a lot," Salisbury said. "Many are better off due to defined-benefit plans, but for most retirees, the move away from defined-benefit plans has had limited or no negative impact on their financial well-being, as they never had the benefit."
Harder to debate is that private-sector employers are heading for the exits. Although most public-sector workers still have traditional pensions, just 35 percent of Fortune 1000 corporations had active plans in 2011, down from 59 percent in 2011, according to Towers Watson, the employee benefits consulting firm. In most cases, these plans have been replaced by defined-contribution plans - mainly 401(k)s - which shift the risks of market return and longevity from employers to workers.
Honeywell International has more than 40,000 active employees in its DB plans, and has contributed $4.5 billion to them just since 2008. But it stopped offering DB pensions to new employees in 2013, replacing them with an enhanced 401(k) match. (Honeywell already offered a 401(k) plan that DB participants can participate in alongside the DB plan).
"I don't know of any major corporation that would start a DB plan today," said Kevin Covert, vice president and deputy general counsel for human resources at Honeywell. Covert cited the risk of market volatility and the increasing exposure to class actions as key reasons.
Covert argued that DB plans would appeal to Honeywell - and its shareholders - only if they helped attract and retain employees. But he said the company's data shows they don't matter to most workers.
"Employees don't understand them or appreciate them," he said. "They'd much rather have an individual account where they can invest, and increase their 401(k) match."
That conclusion is at odds with industry research, which found DB plans play a strong role in attracting and retaining employees. A forthcoming study from Towers Watson of more than 22,000 workers in 12 countries found that 75 percent of workers at companies offering DB plans want to stay with those employers until they retire, compared with only 55 percent at companies with only defined-contribution plans.
The shift of market risk to employees is the most worrisome trend. Many retirement savers sustained heavy losses in the market crash of 2008-2009. Now, with the stock market riding high, 401(k) plan participants' exposure to stocks is at its highest in six years -- on average, 65.4 percent of plan participants' assets were in equities at the end of April, up from 48 percent in early 2009, according to the benefits consulting firm Aon Hewitt.
For many retirement investors, the gold watch and the monthly check could start to look pretty good before long.
For more from Mark Miller, see link.reuters.com/qyk97s
(The opinions expressed here are those of the author, a columnist for Reuters.)
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Editing by Douglas Royalty)