In the 1970s, some corporations asked the government if they could put aside retirement money, tax-free, for their executives. Officials gave permission, provided the companies offered the opportunity to all workers, never expecting the plans to take off….The 401(k) plan slipped in “under the radar,” says Teresa Ghilarducci, and economist at the New School for Social Research in New York. The idea was that this new plan–in which workers set aside pretax earnings in investment accounts–would supplement the rank-and-file’s old fashioned pension plan, the type that sends out a monthly check.
But as companies sought to hold down costs, more and more froze the old-fashioned plan and went solely with a 401(k). “What [the government] didn’t anticipate was the erosion of well-defined benefit plans,” she says. “They never conceived that the 401(k) would be the only retirement plan that companies provided. That’s what we economists call ‘unintended consequences’ of a law.”
The 401(k) is replacing pension plans. And it’s easy to see why. Pension plans are a real albatross around the neck of companies. Pension plans support people who don’t work for these employers anymore.
Now, with this new portable pension, each worker has ownership of their retirement money. All of us are able to change careers and start any kind of business we want.
HOORAY! The individual is in charge!
But wait..
OH NO! the individual is in charge!
Most 401(k) plans require that the individual actually put some money in. The employer will match funds, but you have to ante up. It’s your own fault if your 401(k) is empty. And you are free to screw it up.
Old-style pensions were managed by the employer and doled out a set amount each month. Pension plans could go under if the company went under, and the individual is powerless to do anything.
Pensions and 401(k) plans are both subject to the market. But the employer swallowed the risk in pension plans. With the 401(k), the risk and the reward is on the individual. The individual has the power with a 401(k).
It started out that the muckity-mucks in large companies wanted a way to feather their own nests. But in the end, all of us are more free to move around, improve ourselves and our careers and maybe even find our own path to muckity-muckhood.
It just shows how it’s best not to over-regulate market forces. If the government gets out of the way, things can shake down in positive ways. No one predicted how this would happen, but it’s resulted in a lot more freedom for everybody.
C’mon Murphy. Do you really believe that companies are better off without pensioned employees? In the beginning, they were a loyalty agreement between employer and employee – allow me to exploit your human capital when you are young and your reward will be retirement capital. Pensions only got into trouble when they became part of the balance sheet and how they were viewed tax-wise was changed. Don’t you think companies are better off when they can reward – no guarantee that they will thank you for your contribution long after you retire?
At the current pace, they only account for about 21% of the retired or soon-to-be-retired workforce’s plan. But ask those folks how they feel about them and their answers will all be accompanied with a sigh of relief. They are retirement stabilizers, and as market forces have recently exhibited, in a not-so-stabile environment.
Mobility was always there for those who understood the nature of risk. Folks were never tethered to their jobs in the early days of their employment because “they had a pension”. But after twenty or thirty years, they actually choose to stay put. Once again ask any fifty year old worker who has an underfunded retirement plan and no prospects of a new job how she/he would feel about a pension? It is also worth noting that many employers offer pension employees a 401(k) as well and there is surprisingly large amount of participants who use it as well.
Lack of regulation has had more of a detrimental effect on the worker than the employer. Which always amazed me considering the one market force no one ever discusses: the symbiotic relationship between the employer and employee. Without one, the other would not survive.
I think that your illustration is not calsipeley useful.The average pot that is a352k which would give an income of a33200 or a32600 if you are about to retire. The average salary is a326000, or even if you were lucky enough to be in the top 25% of earners, you are earning just under a332,000.the idea of putting away another a310 rather than a31000 per month into a pension is very unrealistic in this current situation.If you manage to retire at 60 then you will have no one to play glof with as your friends will be working for another seven years at least.We also need to be very careful where we put our savings for our retirement, so many pension funds have been lost or looted, so you may find that your fund is less than you thought, or even less than you put in, and what that fund buys you is less than you thought.We need to put more emphasis on spending less now, saving it and investing it in many different ways and needing less in our retirement by sharing resources and costs.