This week is National Retirement Planning Week. During this week, the financial services industry encourages Americans to focus on setting aside what they’ll ultimately need for a secure retirement. Unfortunately, many Americans will only be able to save for retirement through an IRAs or 401(k). As the loyal readers of Defined Benefit already know though, 401(k)s have failed to provide a secure retirement for working families.
Recently, Fidelity Investments partnered with the Huffington Post to promote a video purporting to tell “the history of retirement.” The video, of course, doesn’t tell the whole story. It celebrates the creation of 401(k)s in the 1970s but doesn’t discuss how the rise of 401(k)s has weakened retirement security.
Here at NPPC, we recently released a report on the history of public pensions called Why Pensions Matter. The history of 401(k)s is not as rosy as the investment industry may make it seem. In 1983, among employees with a workplace retirement plan, 62 percent participated in a defined benefit plan; only 12 percent had a defined contribution plan; and 26 percent participated in both. Three decades later, those numbers are almost reversed. In 2013, only 17 percent of private sector employees participated solely in a defined benefit plan; 71 percent participated solely in a defined contribution plan; and only 13 percent participated in both.
Another consequence of the shift to 401(k)s is that private sector employers are contributing less to their employees’ retirement plans than before. One study found that when companies switched from defined benefit pensions to defined contribution plans, the amount they contributed on behalf of each employee was cut almost in half. At the end of the day, if you put less money in, you will get less money out. Not only are employers contributing less toward their employees’ retirement, but 401(k) plans achieve lower investment returns than defined benefit pension plans, so employees are getting hit twice with lower contributions and lower returns.
In Florida, public employees are given a choice between participating in the public pension plan or participating in a 401(k)-style plan. If new employees do not make a choice, they are enrolled in the defined benefit pension by default. There is currently a bill being considered by the legislature to change the default option from the pension to the 401(k). This would be an ill-advised change for Florida’s public employees because the majority of new hires go with the default option. It may be the case that most new public employees know the default option is the pension and that is what they want so they just default into it, but it may also be the case that these new hires lack the financial literacy to know what their best option for retirement is. Retirement planning that truly values the best interests of workers would educate them on their options and what kind of retirement income they can achieve through these different plans.
Retirement planning is something every working person should do and as early in their career as possible. However, many working people face real challenges saving for retirement with the retirement savings products that are offered to them. As NPPC’s new report finds, cities and states have offered defined benefit pensions to their public employees for over a hundred years because pensions are the best way for workers to earn a secure and dignified retirement.