Could the Traditional Pension Plan Make a Comeback?
The great 401(k) experiment of do-it-yourself retirement plans was always a better deal for the financial services industry that profited handsomely from managing them than for employers and workers.
Pension plans never really went away—despite beliefs to the contrary that they are fatally flawed, with 401(k)s being the only sustainable retirement plans. The reality is that there are still 50,000 financially healthy pension plans in the United States. Most public sector workers, for sure a minority of all workers, still have pension plans. The other reality, though, is that progressively fewer workers since the early 1980s have had access to traditional pensions plans.
The general experience in American workplaces has been that once gone, pension plans do not come back. Here and there the trend has been bucked with pension plans returning to replace 401(k)s. In 2008, West Virgina public teachers voted to return their pension plan that had been taken away by the state legislature in 1991. The 401(k)-like plan that replaced it had produced such poor returns that participants were facing poverty in retirement. In 2012, after a long campaign, Connecticut state employees were allowed on a voluntary basis to switch out of a 401(k)-like plan into the state’s traditional pension plan.
More recently, there have been developments of potential large-scale replacements of 401(k)s with pension plans that may portend the beginnings of a significant pension comeback.
There is plenty of evidence that a dollar invested in a traditional pension plan delivers far more retirement income than one invested in a 401(k).
In 2006 the Alaska state legislature took away the pension plan for schoolteachers and replaced it with a 401(k). School teachers and their union never accepted the change and continually fought to reverse it. This year they may succeed. The Alaska Senate has voted to reinstate the pension plan. If the House of Representatives, where the fight will be tougher, follows suit, the plan will be reinstated.
Proponents of the reinstatement argued that Alaska was having a hard time keeping teachers who were quitting and leaving for teaching positions in states that had pension plans, which most do. Opponents of the change have argued, as they usually do, that it would be too expensive. But there is plenty of evidence that a dollar invested in a traditional pension plan delivers far more retirement income than one invested in a 401(k). Further, consulting New School economist Teresa Ghilarducci showed that Alaska would actually save $76 million annually by making the change.
If that can occur in Republican-dominated Alaska, union-strong Michigan, where state employees lost their pension plan in 1997, would seem to be a candidate for a similar development.
Meanwhile, in corporate America where pension plans have dwindled to near extinction, IBM has announced that it may develop a cash balance plan, a kind of quasi-pension plan, to replace its 401(k). Cash balance plans do not deliver as much retirement income as traditional defined-benefit pension plans, but they do have three advantages for workers over 401(k)s. Collective plan contributions are professionally invested, producing higher returns than the often-amateur investments of 401(k) participants. Once credited to participant accounts, contributions remain regardless of future market activity unlike with 401(k)s. And, by law, cash balance plans are required to offer life pensions from their funds that deliver significantly more retirement income than life annuities that life insurance companies sell to 401(k) participants.
IBM’s accountants are exploring the cash balance model mainly because it offers tax advantages over 401(k)s. At the same time investment risks, as with 401(k)s, are shouldered by participants, unlike with traditional pension plans.
The great 401(k) experiment of do-it-yourself retirement plans was always a better deal for the financial services industry that profited handsomely from managing them. For employers it was less of a good deal. Some are now beginning to do until recently the unthinkable and explore readopting the P word.
