What's killing the employee pension plan?
September 26, 2013
If your employer doesn't provide you with a traditional defined benefit pension plan, don't feel bad -- you're far from alone.
According to March 2013 figures from the Bureau of Labor Statistics (BLS), only 8 percent of private-sector companies offered a defined benefit retirement plan -- what is commonly known as a pension -- to their employees. Only 16 percent of private-sector workers were participating in a pension plan at that time.
But while the percentage of companies that offer defined benefit plans has shrunk in recent years -- 21 percent of private-sector workers were enrolled in these plans in 2005 -- the number of private-sector companies offering defined contribution plans has grown. With these plans, employees are largely responsible for saving for their own retirement. The 401(k) is the most popular of these options.
"From one year to the next it doesn't change: There has been a long trend toward a decline in the number of traditional pension plans being offered," says William Wiatrowski, associate commissioner at the Bureau of Labor Statistics in Washington, D.C.
Why are pensions disappearing?
Wiatrowski points to risk. Private companies want to take on less risk when helping to provide for their employees' retirement. It's why these companies are ever more frequently turning to defined contribution plans -- such as 401(k) plans -- in which employees typically fund most of their own retirement by automatically setting aside money from each paycheck.
This differs from traditional defined benefit pension plans, in which employers promise to provide their workers a specific monthly payout once they retire.
In a defined benefit pension plan, the risk of retirement funding falls on employers, Wiatrowski says. Employers must provide the benefits they've promised employees no matter if the company is struggling or if it's made poor investments.
This isn't the case with defined contribution plans.
"In defined contribution plans, the risk falls to the employees," Wiatrowski says. "The employer might match some or all of their employees' savings, but they still know that each month or once a year they'll have to put in 'X' amount of dollars. Their commitment is a fixed amount. The employees take on the risk when it comes to the investments that they are putting their retirement savings in. Those investments can do well or they can do poorly. But the risk is no longer on companies."
Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the Wharton School at the University of Pennsylvania in Philadelphia, says that defined benefit pension plans were often offered by companies in the so-called rust belt industries, such as steel, auto manufacturing, airlines and railroads. Many of these industries are struggling today, and because of that can no longer afford to offer defined benefit pension plans, Mitchell says.
At the same time, companies that provide defined benefit plans must also pay into the Pension Benefit Guaranty Corp., a government-run insurance program that protects the retirement incomes of retirees relying on traditional pensions. The costs for this insurance are steadily rising, making defined benefit plans more expensive for private companies, Mitchell says.
"It's a little like a death spiral," Mitchell says. "Those insurance premiums are going up because so many defined benefit plans suffer bankruptcies and inadequate funding to back up their promises. The more companies offering these plans that go bust, the higher the Pension Benefit Guaranty Corporation has to raise its premiums and the more employers that are forced to stop offering these plans."
Laura Bos, manager of financial security at the Washington, D.C. headquarters of AARP, says that defined contribution plans were originally launched to serve as a supplement to defined benefit plans.
"Now many workers see defined contribution plans as their only way to save for retirement in the workplace," Bos says.
Bos says that those employees who rely on defined contribution plans need to take an active role in their retirement savings. This means regularly studying the investment mix in their 401(k) plans and making sure that they set aside a high enough percentage of their earnings with each paycheck. Bos suggests that employees save at least 10 percent to 20 percent of their earnings when relying on a 401(k) plan.
Which employers still offer pensions?
Unlike the businesses in the private sector, most state and local government agencies still offer defined benefit plans. BLS figures show that 78 percent of state and local government workers were participating in a defined benefit plan as of March 2013.
If you want to increase your odds of nabbing a defined benefit pension plan in the private sector, seek out a larger workplace. Forty-nine percent of private companies with 500 or more workers offered defined benefit pension plans as of March 2013, according to the BLS. Only 7 percent of companies with one to 99 workers did the same.
But if you don't land at an employer that offers a defined benefit pension plan, you don't necessarily have to fret.
"I've only ever had a defined contribution plan," Mitchell says. "And I've always thought it was a pretty good vehicle to help you prepare for retirement."