Over four decades ago one small change to the Internal Revenue Code through the 1978 Revenue Act changed the course of retirement in America. Section 401(k), originally a retirement tax-deferral initiative, eventually became the name of a financial product, but it was never intended to be workers’ primary retirement tool. By shifting fees and investment decisions onto the employees, profit-motivated private-sector companies could cut costs related to caring for their workers and repurpose that money into driving record profits and executive compensation. But a recent move by IBM to scrap their 401(k) match in favor of a defined-benefit retirement package has caused a lot of buzz. Is the private sector ready to return to pensions?
Defined-contribution (DC) accounts like the 401(k) have proven to be inadequate retirement vehicles, leading generations of workers into an impending retirement insecurity crisis. This year’s United Automobile Workers (UAW) demand for pension reinstatement in their contract negotiations (and subsequent strikes) indicates American workers’ growing dissatisfaction with defined-contribution retirement plans. And while UAW agreed to a contract that didn’t include pensions this time, it amplified the conversation about today’s workers’ desire to return to the secure retirement option of their predecessors.
BM announced its intentions to switch employees to a cash balance plan–which is a DB plan-intentions to switch employees to a cash balance plan–which is a DB plan, but not a pension–due to several factors, including employee input. IBM employees aren’t the only workers looking for more retirement security than a DC plan can offer. A 2020 study from the National Institute on Retirement Security (NIRS) determined that 84% of millennials working in the public sector credit pensions as a motivating factor in job loyalty. A recent article in the New York Times found that companies that offer pensions on recruiting websites such as Glassdoor consistently garner higher employee ratings and have a significant edge over competitors.
Banking giant J.P. Morgan Asset Management released a study in this year that encouraged companies to reevaluate their position on barring DB retirement plans. The study determined that pensions benefit employees and the plan sponsors–the companies themselves. “In the U.S., corporate sponsors of private defined benefit (DB) pension plans seem to have developed a collective blind spot about the potential value of maintaining a well-funded pension,” the text reads. “We would encourage sponsors to consider the numerous business reasons for keeping their plans open—or even reopening them, if closed. Closing, freezing, and terminating plans may offer far less value than the conventional wisdom would suggest.” Noting that pension plans have long since recovered from the Great Recession global financial crisis of 2008, the study concluded that corporations have developed a collective “blind spot” when it comes to DB plans.
The Pew Charitable Trusts echoed this sentiment with their most recent State Pension Funding Gap report, which confirmed that “a decade of reforms, including benefit design changes, improved fiscal discipline, and greater monitoring of the health of public retirement systems, no state is at risk of insolvency and the majority have stabilized their pension debt.” The recurring study found that in 2016, seven states fell under the threshold that put them at risk; by 2018, that number had dropped to two. In 2021, all states offering public pensions were standing on solid ground.
Time will determine if all this good news will put pensions back on the table for the private sector. We believe every American–whether in the public or private sector–deserves to retire with dignity.
