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Use It or Lose It

When EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013 — in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice DB pension plan and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former — well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). As it turned out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (which by then had become a 401(k)), and a pension accrual of … $0.00.

At the time, I didn’t think much about that. Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss. By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation — but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, tenure data suggest that my job experience was something of an anomaly. When you consider that median job tenure in the United States has hovered in the five- to seven-year range going back to the early 1950s,[1. See “Employee Tenure Trends, 1983–2012,” here.] there have doubtless been many private-sector workers who were, for a time, participants in a pension plan, only to see little or nothing come of that participation.[2. And a great number of private-sector workers never participated in a defined benefit plan. See “Pension Plan Participation” here.]

I often hear people — including many retirement plan advisors — say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement. Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” (as in three-legged stool) to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation or more, they would provide far less.[3. A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of DC and DB plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans” here.]

In both cases, it’s not the design that’s at fault — it’s how they are used, both by those who sponsor these programs and by those who are covered by them. And, as advisors well know, with voluntary savings programs, if you don’t use it, you lose.

Footnotes

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