Lamenters of the 401(k) Revolution

The 2017 media-bashing of the 401(k) is off to an early start.

The most recent is a Wall Street Journal article (subscription required) whose headline notes that “The Champions1 of the 401(k) Lament the Revolution They Started” (the third-most read article on the WSJ site as I write this).

It’s fair to say, I think, that their regrets aren’t so much about the 401(k) itself, but their sense that the existence of the 401(k) – which transformed the notion of retirement savings in so-called savings and thrift plans by allowing regular workers to defer paying taxes on money they set aside for retirement – led to the demise of the traditional defined benefit plan.

Well, maybe.

Trust me, I “get” the affection for the promise of a DB plan. Who wouldn’t like a plan that is funded (and paid for) by your employer, invested by your employer, and at retirement, produces regular, predictable distributions without you having to do anything except making sure they know where to send the check(s)?

That, of course, assumes that you had one. Even in their heyday, DB plans not only weren’t available to everyone, they weren’t even available to most workers in the private sector. The WSJ article acknowledges that just 38% of all private-sector workers had a traditional pension in 1979 (13% do today). Where were the headlines in 1979 about fewer than 4 in 10 workers being covered by a pension plan?

And that was just being “covered.” While coverage like that in the WSJ article tends to equate coverage with receiving benefits, that’s just not the way it was. To get that full benefit from that DB plan back in their heyday, you’d likely have had to work there at least 10 years, if not 15. And while we seem to think that 40 years ago Americans worked for a single employer their whole career, that wasn’t the case in the private sector, even in the DB’s heyday (and certainly today) didn’t.2

The data show that for the very most part we have long been a nation of relatively short-tenured workers. How short? Well, the median job tenure in the United States — how long workers stay at one job — has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping.

What that means is that even workers who were “covered” by a pension plan in the private sector weren’t working with that employer long enough to get much – or any – of that promised pension benefit.

That doesn’t mean that those who were, and those who continue to be, covered by DB plans shouldn’t be grateful. But it’s time to stop lamenting the demise of DB plans – and it’s well past time to stop blaming the 401(k) as the culprit. Let’s be honest: It was changes in accounting rules, fueled by the occasional market turmoil, and exacerbated by artificially constrained interest rates over a prolonged period, done no good by the stricter (though well-intentioned) funding requirements in the ironically named Pension Protection Act of 2006. Not to mention, though some may dispute this, a workforce that, writ large, never seemed to fully understand or appreciate the value of these programs (perhaps because so many of them left before vesting).

As for those who want to blame the 401(k) for the nation’s retirement readiness – well, as has been said before, that’s a bit like blaming the well for the drought.

There is little question that the reality of the 401(k) struggles to live up to the myth of the defined benefit plan. No doubt that the voluntary design (even with auto-encouragements), sporadic availability among smaller employers, and the inherent complexity of individual savings and investment decisions provide challenges.

Regardless, and despite a plethora of media coverage and academic hand-wringing that suggests they are wasting their time, the American public has, through thick and thin, largely hung in there – when they are given the opportunity to do so.

The good news is that far many more American workers have that opportunity today than ever before. But not everyone.

And that really is lamentable.


  1. Who are these champions? The real surprise is the article’s framing of the New School’s Teresa Ghilarducci as a former champion of the 401(k) concept (she claims to have once told unions that people only needed to save 3%, assuming 7% returns. Her position may have changed, but her math doesn’t appear to have – see “Rescuing Retirement from the ‘Rescuers’.”
  2. A 2013 analysis by EBRI reveals that a defined benefit is not always “better,” at least not defined as providing financial resources in retirement. In fact, if historical rates of return are assumed, as well as annuity purchase prices reflecting average bond rates over the last 27 years, the median comparisons show a strong outcome advantage for voluntary enrollment 401(k) plans over both stylized, final average DB plan and cash balance plan designs.

Add Your Comments


  1. url url'>Joe Gordon
    Posted January 3, 2017 at 11:08 am | Permalink

    I agree with Nevin… for those in the pension biz in the ’80’s, most recall that with every tax act passed by Congress came more onerous DB requirements, leading to massive terminations. The inept PBGC also contributed mightily to the cause as most big union DB plan liabilities were dumped at their door during bankruptcy… Steel, auto and airlines come to mind. Anyone remember Pan Am, Eastern and TWA, to name a few? And then last year or so, Congress rescues the highway trust fund by gauging DB plans again in the name of sky high PBGC premium increases. The lamenters seem mostly whiners who want social engineering to fix things, similar to ACA. How did that work out?

  2. Mike Sladky
    Posted January 3, 2017 at 11:19 am | Permalink

    The 401k system is not broke it is a large number of baby boomers that are broke; and not because they did not have access to a retirement savings plan.

    This lack of access to a 401k plan is the biggest lie (misinformation) of the WSJ article. Last time I checked all US citizens that have earned income can make tax deductible contributions to an individual retirement account (i.e., an IRA) since 1975.

  3. url url'>Gern Blanderson
    Posted January 4, 2017 at 10:48 am | Permalink

    The 401k, pensions, and social security all have flaws and are disappointing. None of them are the “golden” fix. The media can write all the articles they want about 401k flaws, but we have to come the reality that society/government can’t create a safe retirement. Just look at the recent CALpers scandal with them reducing the pension payments to retirees who were employed from bankrupted towns/cities. Nothing is foolproof. The solution needs to come from each individual. The individual decision to spend less than you earn, save large amounts of money, and adjust your expectations about quality of life.

  4. Robb Smith
    Posted January 6, 2017 at 8:32 am | Permalink

    What seems to be conveyed in any article trumpeting the “good ole’ days” of DB plans is assumption that ALL workers were covered by a pension. Nothing could be further from the truth. The vast majority workers had no pre-tax employer-sponsored plan – save those that worked at large employers such as was the case for the gentlemen in the article. While any good idea has its faults, 401ks (as well as IRAs) have provided a way for small businesses and their employees to break the glass ceiling and to save for retirement using a company sponsored vehicle where a DB plan would have been out of the question. Rank and file workers in general are far better off because of 401ks than they would be under the good ole’ days of DB plans. Side note: be wary anytime an article quotes Teresa Ghilarducci.

  5. url url'>Chris Krueger
    Posted January 6, 2017 at 2:49 pm | Permalink

    Providing Retirement Readiness assistance would be more productive than discussing the shortcomings of 401(k) plans.

    Thanks Nevin for your insight.
    Standard of (k)are™

  6. Jack Towarnicky
    Posted January 8, 2017 at 5:00 pm | Permalink

    It is certainly inaccurate to ascribe start of the decline of DB plans to the growth of 401(k) plans. Sylvester Schieber, then Research Director of the Employee Benefits Research Institute, noted in April 11, 1983 Senate testimony, using data that predated the §401(k), that: “… Another facet of the ERISA experience is the notable shift toward defined contribution plans. … Prior to the passage of ERISA, the number of newly qualified and net growth in defined benefit plans consistently exceeded … net defined contribution plan growth. If the 1973 defined benefit plan creation rate had persisted, nearly 190,000 net plans would have developed between 1975 and 1980. Actual net growth was 40,348 defined benefit plans. Based on the same criteria, however, only 144,000 defined contribution plans would have been created but actual growth was 157,175. … Elements of TEFRA may further increase the prevalence of defined contribution over defined benefit plans. …” So, while IRC §401(k) was added by the Tax Reform Act of 1978, regulations were not issued until 1981, so, defined benefit pension plans started to fall out of favor BEFORE the first 401k plan was created.

    Just as important, as Nevin suggests, defined benefit pension plans were not as lucrative as today’s plans. For example, in my last plan sponsor role, that employer’s defined benefit pension plan was adopted March 1, 1946. Its’ pre-ERISA design of the late 1960’s early 1970’s had a participation entry age of 35, used 15 year cliff vesting, required voluntary enrollment, and charged a 2% of pay employee contribution. The benefit was determined using a percentage of career average pay. It contained no early retirement subsidy nor any post-retirement automatic cost of living adjustment. Importantly, those who were eligible to and commenced benefits early would have to accept an initial benefit that would be actuarially reduced to equal the present value of the benefit that could have commenced at age 65 (back at a time when life expectancy for those age 65 was into the mid- to late 70’s). Just as importantly, once a retiree’s benefit was in a payout status, that plan used the annuity contract’s actual investment performance to either increase or reduce the amount of retirees’ benefit. That is, retirees participated in the investment performance of the plan – good or bad. And, it was bad – since the annual rate of return of the S&P 500 was 1.6% during the 1970’s, and since average annual inflation was 5 times as high! So, many retirees of this firm saw reductions in their monthly benefits (or at least reductions in the real dollar value of their benefits) as the end of the 1970’s approached.

  7. url url'>Allen Steinberg
    Posted January 13, 2017 at 1:58 am | Permalink

    I agree that the reality of life in the heyday of the DB plan was not as idyllic as some represent. And, it is easy enough to bash government policy for decline of DB plans. But, deep down there are also larger economic and demographic trends at plan. A DB plan can be a 50, 60 or 70-year financial commitment to an individual. Does anyone really believe that companies can make such commitments–especially in light of the business disruptions we have seen in the past few decades.

One Trackback

  1. By Were pensions really all that? - CDM Retirement on January 17, 2017 at 4:48 pm

    […] the Revolution They Started” voicing those who see the 401(k) as a failure, paired with the thoughtful rebuttal by Nevin Adams of the National Association of Plan Advisor got us […]

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