What You Need to Know
- Defined benefit pension plans are less common than they used to be.
- Workers rarely put enough cash in their 401(k) plans.
- The federal government has not been putting enough cash in the Social Security trust funds, either.
The time has come for employers to make mandatory contributions to defined contribution plans. Please do not shoot the messenger: We need to address this reality in order to achieve the retirement outcomes needed for Americans.
Farewell, Pension Plans
As a country, we have effectively eliminated defined benefit pension plans. According to CNN Money, the percentage of workers in the private sector whose only retirement account is a defined benefit pension plan is now 4%, down from 60% in the early 1980s. About 14% of companies offer a combination of both defined benefit pension plans and defined contribution retirement plans.
At the same time, Fidelity Investments recently reported that the average 401(k) balance reached a record $130,700 in the fourth quarter 2021.
While this is a wonderful result, this amount will not provide enough supplemental retirement income to maintain employee lifestyles when employees stop working, after taking into consideration increased living costs and projected life expectancies.
Lastly, on a global basis the United States’ existing retirement laws, regulations and structures are producing outcomes that rank well down the major country rankings.
Realizing that change is needed, our legislators at the federal and state level continue to look for ways to reform our defined contribution-focused retirement system and increase projected future savings by expanding access to retirement plans and allowing lifetime income products to be part of plans.
While these efforts are laudable, they do not go far enough.
In my view the proposed changes will not translate into accumulating the amount of needed assets to generate satisfactory retirement outcomes for households.
We will likely fall short as increasing access or adding income options does not necessarily equate to actually having cash in retirement accounts when full-time work ends.
What is needed is to mandate having defined contribution plans in place for all workers – both part-time and full-time – and requiring minimum corporate retirement contributions.
At the same time there needs to be an effort to encourage American business to making satisfactory retirement outcomes a key part of compensation planning
Let’s explore why these mandates are needed.
Here are some thoughts on the environment we face today and for the near future:
1. The Defined Contribution Plan Shift
Over the last several decades through legislation and regulation we have moved the responsibility for retirement saving from corporations to individuals.
We have put households, already dealing with the high costs of living including energy, health care, education and housing, in charge of saving enough to provide future incomes that will allow them to have reasonable lifestyles in later life.
At the same time wages have not increased sufficiently to compensate for the increase in living costs.