Reuters Money

Value of retirement plans falls as employers shed pensions

August 3, 2010

towers watson Reuters – 7/30/10 Value of workplace retirement plans plunge as employers shed traditional pensions By Mark Miller Tax-deferred workplace retirement plans were never intended to replace the traditional defined benefit pension, and new research confirms that they have not. The near-disappearance of defined benefit pensions led to a 19 percent decline in the value of private sector retirement plans in the ten-year period ending in 2008, according to new research from Towers Watson, the employee benefits consulting firm. The value of traditional defined benefit pensions in eight major industries studied by Towers Watson fell from 4.19 percent of pay in 1998 to 1.99 percent in 2008—a plunge of 53 percent. During the same period, the value of employer contributions to defined contribution plans—chiefly 401(k) accounts—rose just 38 percent, from 2.89 percent of pay to 3.99 percent. The 401(k) takes its name from a section of the Internal Revenue code that made the accounts possible. Policymakers’ initial intent was to offer taxpayers breaks on deferred income; but plan sponsors soon realized they could use the provision to offer voluntary workplace savings plans using a pretax payroll deduction, and the 401(k) took off in the early 1980s. Initially, 401(k)s were seen as a way to supplement existing defined benefit (DB) pensions—and that’s why the rules gave employees so much control over decisions such as whether to participate, how much to contribute, what to invest in and when to withdraw funds. But employers began reducing their commitment to DB plans as they looked for ways to get more competitive in an increasingly global economy. The soaring cost of employee benefits created additional pressure on plan sponsors to save money on retirement benefits, according to Kevin Wagner, a senior consultant at Towers Watson. “Weve seen the absolute abandonment of the traditional pension plan among the Fortune 100 in the past ten years,” he said. “We’ve gone from about 80 percent of these companies offering defined benefit pensions to about 20 percent now. And the companies that do have them are going to have cash-balance plans, rather than traditional defined benefit plans. We’re moving to an account-based, do-it-yourself employee plan.” (Cash-balance plans are employer funded account-based defined benefit plans, typically paid out as lump sums when employees leave the company). The largest declines in overall retirement benefit value were found in retailing, manufacturing and energy; much smaller declines were registered at pharmaceuticals, financial services and health care companies. The service sector registered the only increase (see accompanying chart). “The sectors that have been more troubled also are the industries where pension liabilities can represent a large percentage of the total value of the company,” Wagner said. “So that’s where we are seeing the largest drop in the value of benefits.” The study doesn’t capture trends in the post-crash environment of 2009, when 18 percent of employers suspended or reduced their matching 401(k) contributions, according to separate Towers Watson research. The firm reports that 34 percent of the companies that did suspend their contributions restored them this year to previous levels; another 49 percent say they are considering bringing back their matching contributions in 2011. Wagner says the need to fund soaring employee health care benefits has forced employers to shift dollars away from pension benefits. That pressure may be reduced over the next few years due to features of the new health care reform law that affect retiree health benefits. The most immediate changes will impact prescription drug coverage for retirees. The Affordable Care Act eliminates federal subsidies and tax breaks that employers had been receiving when they provided drug coverage. That is likely to prompt many employers to move retirees to Medicare’s Part D drug benefit, which will have richer benefits under health care reform, but likely will involve smaller employer contributions. Wagner also thinks employers will start shifting to account-based benefits for all retiree health benefits. However, it’s not likely that cuts in health care spending will lead to restoration of defined benefit pensions. “It just means that defined contribution retirement benefits could become more affordable for employers,” says Wagner. Mark Miller is a journalist and author who writes about trends in retirement and aging. He is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living and edits contributor Mark Miller is a journalist and author who writes about trends in retirement and aging. The opinions expressed here are his own.

Saving for retirement? Watch 401(k) fees

July 22, 2010

The following is by John Wasik, a columnist for and author of “The Audacity of Help: Obama’s Economic Plan and the Remaking of America.” The opinions expressed are his own.

Most Americans will run out of retirement savings, says new research

July 13, 2010

Are you financially ready for retirement?

New research by the Employee Benefits Research Institute shows that most Americans — regardless of their income bracket — will exhaust their retirement savings after 10 or 20 years of retirement.