The Champions of the 401(k) Lament the Revolution They Started

[marko]

I'm sure the people on here have done well with their 401ks, IRAs 403bs etc, but they would probably have done better with a well managed DB plan and the larger employer contributions that often came with those old plans.

Not in my case! I'll take my 401K//IRA thank you very much.
I had an extremely well managed pension plan and when offered took the lump sum.

Doing about double what I would've gotten.

 

[Mdlerth]

One or t'other? How about neither?

It is not possible to prove, but employer-sponsored pensions might have been discontinued anyway regardless of whether the 401k was introduced. Consider how many other once-common benefits have been either withdrawn or whittled away, and without a substitute offered. How many of us believe that the DB pension would uniquely have survived managerial poaching if there were no 401k/IRA/TSPs?

 

[RobbieB]

I agree, why would any Co. nowadays sponsor a pension plan?

More cost both financial and personnel, more liability and more legal.

Even in Japan the concept of "employment for life" is no more.

Every time I left a Co I rolled the 401K dough into my IRA so I could have control.

 

[jollystomper]

It is not possible to prove, but employer-sponsored pensions might have been discontinued anyway regardless of whether the 401k was introduced. Consider how many other once-common benefits have been either withdrawn or whittled away, and without a substitute offered. How many of us believe that the DB pension would uniquely have survived managerial poaching if there were no 401k/IRA/TSPs?

+1

Given all the ways corporations seek to improve profit, I think DB plans would have been impacted regardless of the existence of the 401K.

One thing I may have missed being mentioned in this thread - one of the reasons DB plans came about was due to worker shortage. When companies have to compete for workers, benefits are offered as a competitive advantage. Companies not only wanted workers, they also wanted workers to stick around for a long time. That is one reason DB plans became almost standard.

Once technology enabled increased worker productivity, elimination of certain jobs, and a global workforce, the relative shortage of workers decreased greatly. In addition, due to rapid technology changes more companies did not see the benefit of workers sticking around as long, the increased workforce led to the perception that it was cheaper to hire new workers for new areas than retrain existing ones. I believe that has to be factored into consideration. Maybe it is a bigger impact than 401k plans in leading to the demise of DB plans.

 

[nun]

We would not have done better with a DB plan- we are 53 and 46 and can retire NOW- most people with DB plans have to wait till they are old enough to qualify for the payout. About half of our portfolio value is in 401k- type plans, and we were able to accumulate the amount we have in a large part because of the tax deduction- we couldn't have saved this much if we'd had to pay taxes on it up front.

It really isn't possible to say that DB plans in general would not have been better for you. Certainly a non-contributory plan would have had some obvious advantages.

So given the choice would you have done when I did when I used $280k from my DC plan to buy in to my employer's DB plan to get a $20k/year pension with a 3% COLA on the first $13k starting at age 55? There is a death benefit that declines as I get older, but is currently $200k to my heirs, the payout rate is 7% and if I live the average mortality age of 83 for a 55 year old man then I would need to get an annual return of 7% on my original $280k to match the pension income. I found those numbers pretty convincing that the DB plan was a better bet than staying entirely with DC.

 

[growing_older]

We would not have done better with a DB plan-

I can definitively say this. I actually had several employers with defined benefit pension plans, and all but one of them went out of business BEFORE my vesting date. One cancelled the plan and stayed in business, but the benefit calculation was so back-end loaded, that they paid me out just under $300 while the three founders, who had worked there for decades, took all the money in the plan. Only three non-founders received any payout at all, and mine was the largest. This plan was definitely set up to accrue tax advantages only to the partners.

I am much much better off with an account I can control (at least somewhat) and take with me when I go. Some employers may offer more generous employer contributions to a defined benefit plan, but mine always ended up not paying, so it hardly mattered.

 

[scrabbler1]

In my 23 years of work, my former company had a variety of retirement savings vehicles.


We had a 401k and the company matched 75 cents on the dollar up to 6% of contributions. It began at 50 cents until they raised it in the early 1990s. We could also make after-tax contributions. I did a direct rollover into an IRA when I left.


We had a pension plan but the company froze the pension at the end of 2001 to anyone who didn't meet its grandfather provisions (a combination of age and work experience). I was 38 and had 16 years in, far short of being grandfathered in. This was a pretty big blow to my long-term retirement plan. But thankfully, my peak years of earnings were the ones which went into the pension calculation, as I had just switched to working part-time earlier in 2001.


The plan for those not grandfathered in was a "cash balance" plan which is some hybrid of a DB and DC plan. In 7 (part-time) years in that plan, I accumulated very little. It still grows a little each year due to its "interest credit" and I can take it as a lump sum or as an annuity at some point, but it is pretty worthless compared to my pension.


We also had a company stock program (ESOP) which began in 1997. Again, this coincided with my peak earnings years in the late 1990s, so I accumulated a lot of shares. I think of this as a "super-match" for my pretax 401k. I was allowed to cash it out at low (NUA) tax rates when I left the company in 2008.


For me, the 401k worked fantastically. I stayed the course in late 2008 when I did the rollover, not changing the AA (it was 50/50) even though it was very tempting to divert some of the money away from stocks. The risk I took was my own, but relying on the company to maintain its pension surely didn't work when they froze it. At least my company's pension plan is in good shape from all the money they saved by freezing so many of them. My IRA's value has doubled since I did the rollover in late 2008 and that's with a ~50/50 AA most of the time.

 

[marko]

Specifically what speculation are you referring to? and by whom? We want names.

I think candrew is referring to the "Wall St meltdown" where many of us here bought a ton of stuff at bargain basement prices.

 

[garyt]

I worked for 4 different companies with DB plans and am receiving 3 monthly checks, soon to be 4. To replace the monthly income with savings I would need at least $1.2m and probably closer to $1.5m.

I was fortunate that my last employer also provided a 401k so I had 17 years of being able to make contributions.

Being financially savvy I prefer the DC style 401k plans but realistically I can see how DB plans can be a big boon to most folks.

I knew several otherwise smart folks at work who used move to cash at the bottom of every downturn, and also used to take out 401k loans.

Pensions are all fine and dandy provided they're able to keep paying what they've promised. We have a few people where I work doing menial low pay jobs in their 60's because their pension plans went bust. They should have been set.
A couple worked in the steel industry. The Teamsters has announced that their pension fund will not be able to pay out the full amount promised.

 

[ugeauxgirl]

It really isn't possible to say that DB plans in general would not have been better for you. Certainly a non-contributory plan would have had some obvious advantages.

So given the choice would you have done when I did when I used $280k from my DC plan to buy in to my employer's DB plan to get a $20k/year pension with a 3% COLA on the first $13k starting at age 55? There is a death benefit that declines as I get older, but is currently $200k to my heirs, the payout rate is 7% and if I live the average mortality age of 83 for a 55 year old man then I would need to get an annual return of 7% on my original $280k to match the pension income. I found those numbers pretty convincing that the DB plan was a better bet than staying entirely with DC.

This sounds like a fantastic benefit, congratulations. All pensions are not so generous- and some of them are not so dependable. My dad's next door neighbor was depending on his pension (he had a false sense of security so didn't save much on his own). The company went belly up, and his pension went away the year before he was to retire. He is now upwards of 70 still working.

I do agree with you that db plans are better for a lot of people who are simply not going to save on their own. As others pointed out though, they may have gone away without the advent of 401Ks, and most young people are changing jobs MUCH more frequently than pension plans were designed for- most people changing jobs every 5 years would never qualify for a pension.

 

[nun]

This sounds like a fantastic benefit, congratulations. All pensions are not so generous- and some of them are not so dependable.

Yes for a DB plan to work it needs to be well managed, for contributions to actually be made, and for the assets of the fund to be unavailable to the employer or any of it's creditors.

I've been lucky enough to have a nice mix of retirement savings opportunities having worked in government and private industry. I've had 401k, 403b, and 457. the 401k and 403b money are now in IRAs, but I haven't touched the 457 money because the account has a stable value option and because I can draw form the 457 without penalty before I reach 59.5. Those DC accounts make up 72% of my retirement savings. The other 18% is the $20k DB pension with a COLA. I like the regular income of the DB pension and I because I'm a British expat living in the US I've also contributed to the UK social security system in addition to the US one so I will get two SS checks. I also have some rental income so the hope is to never to have to touch the DC plans other than for RMD reasons.

 

[Texas Proud]

One of the problems I have with the article is that they seem to assume that nothing was going to happen if the 401(k) was not there.... I disagree with this premise....


Companies would have changed DB plans no matter what... they were just becoming too costly and unpredictable (wish the gvmt entities would figure this out)....

My previous mega changed our DB plan to a DC plan (for some reason it is still listed as a DB plan, but it really is DC).... and over the years they have reduced the amount they set aside for employees... So, I worked there 15 years and have a balance of around $140K.... not nearly enough to retire....

Then again, my DB plan was 1% for each year worked with a reduction based on your SS payment... again, not nearly enough to retire...


If it were not for 401(k), I would still be working...

 

[2017ish]

It might be heresy on this forum, but if the government said that I had to save 10% of my salary into the TSP (or other low-expense ratio passively-managed index fund portfolio) before I could save for anything else (car, college, housing expenses including down payment, medical expenses, vacations, booze, marriage), then I would have been OK with that.

I wouldn't have been. When our kids hit college age we knew that our 401k/IRA accounts were well funded (indeed, even then, we knew that we were grossly lopsided in our savings). Wife's income was in a dip after moving states, she had just finished paying 200K for tail coverage, and we knew that I would be reentering the workforce as soon as I'd finished rehabbing our house. Thus, we deliberately chose to not fund 401k/pension for 3 years to cashflow college tuitions, increase cash reserves, and complete the house reconstruction. (We also chose to not take vacations during those years.)

I fail to see how someone else's opinion on that choice would have been more fully informed on our situation--much less how it would be appropriate to compel us to follow that less-informed opinion.

 

[Big_Hitter]

most people changing jobs every 5 years would never qualify for a pension.

huh?

maximum statutory vesting under ERISA for a db plan is 5 years, shorter if the plan is a hybrid

 

[Big_Hitter]

I agree, why would any Co. nowadays sponsor a pension plan?

.

to attract and retain talent in the most efficient manner

 

[pb4uski]

huh?

maximum statutory vesting under ERISA for a db plan is 5 years, shorter if the plan is a hybrid

I think she meant if they change jobs just under 5 years so they never meet the typical 5 year vesting. You're being a bit picky.

 

[exnavynuke]

I think she meant if they change jobs just under 5 years so they never meet the typical 5 year vesting. You're being a bit picky.

Depending on demographics, it may be quite a bit less than 5 years. From the BLS's latest report on tenure:

Median employee tenure was generally higher among older workers than younger ones. For example, the median tenure of workers ages 55 to 64 (10.1 years) was more than three times that of workers ages 25 to 34 years (2.8 years). Also, a larger proportion of older workers than younger workers had 10 years or more of tenure. Among workers ages 60 to 64, 55 percent were employed for at least 10 years with their current employer in January 2016, compared with only 13 percent of those ages 30 to 34.

Up to the mid 30's, people often have less than 3 years at an employer.

 

[athena53]

Not to mention that anyone can save and invest outside of a "retirement plan" as well. I am regularly surprised when coworkers lament that they cannot save any more because they have maxed out their IRA. Not so, you don't have to limit saving for retirement inside retirement plans.

Just out of curiosity I looked at the balances in my investment accounts. Less than half is in IRA- type accounts. I didn't have 401(k)s available to me until I'd been working for 10 years, though.

Interesting point about how DB plans would have been whittled away, anyway. I think that the development of 401(k)s hastened their demise since the employer could appear to be replacing the DB plan with a shiny new benefit (generally with the employer contributions less than they would have put into the pension, and with all the rate of return and mortality risks dumped onto the employee). Many of the companies that kept their DB plans have been shutting them down to new entrants and I believe that's going to continue. You want to read posts from an unhappy group- go to an actuarial discussion board and read the comment sof pension actuaries about their career prospects.

 

[Big_Hitter]

You want to read posts from an unhappy group- go to an actuarial discussion board and read the comment sof pension actuaries about their career prospects.

early or late career pension actuaries?

corporate plans maybe, but there is a lot of opportunity in the public and multi-employer arenas

 

[Big_Hitter]

I think she meant if they change jobs just under 5 years so they never meet the typical 5 year vesting. You're being a bit picky.

me, picky, about something which I'm a SME?

if they change every 2-3 years or so they wouldn't be vested in the employer DC contributions either - qualified plans aren't meant to benefit job hoppers

we have a PS/K plan that puts in about 13% of pay with a 6 year graded vesting schedule - I'm 80% vested

If we had a traditional DB plan where aggregate contributions were pegged at 13% of pay, due to age-leveraging I'd be making out like a bandit, not that I'm complaining about the 13% DC contribution

100% vesting generally applies to employee contributions

 

[nun]

Many of the companies that kept their DB plans have been shutting them down to new entrants and I believe that's going to continue. You want to read posts from an unhappy group- go to an actuarial discussion board and read the comment sof pension actuaries about their career prospects.

Yes, companies shut DB pensions down because they are expensive. Replacing them with DC plans is an effective wage decrease for employees as employer contributions to a DC plan are usually lower than to a DB plan.

Interestingly my ex-employer's default plan was a DB, but there was also a DC option. The contributions to both plans were mandatory and exactly the same at 11% employee and 5% employer match, so not a rich plan for the employees as far as contributions go. Both plans were 401a, but additionally there were 403b and 457 DC plans so if you were over 55 it was possible to put $48k away for retirement in addition to the DB pension.

The employer has made cost cutting changes to the DB plan for new employees that include raising the minimum retirement age from 55 to 60, and using the last 5 years average salary to calculate the pension rather than the last 3.

 

[RobLJ]

We were offered a choice between a DB state pension and a 403b; I took the latter since my wife was a corporate accountant and I thought it was quite possible she would have to move and take another job.
I got lucky (or did well) on the investment side, so I was able to semi-retire at 57 at a SWR that was higher than the DB pension--I'm working online about 15 hours/week, so I haven't even needed to withdraw yet.
I have many colleagues who took the 403b route for whom it hasn't worked so well--2001 and 2008-9 crushed them.

Interestingly my ex-employer's default plan was a DB, but there was also a DC option. The contributions to both plans were mandatory and exactly the same at 11% employee and 5% employer match, so not a rich plan for the employees as far as contributions go. Both plans were 401a, but additionally there were 403b and 457 DC plans so if you were over 55 it was possible to put $48k away for retirement in addition to the DB pension.

 

[Walt34]

Companies would have changed DB plans no matter what... they were just becoming too costly and unpredictable (wish the gvmt entities would figure this out)....

Many of them have and are doing something about it. The plan I'm under was phased out about 1985 (I was hired in 1973) and has been changed several times since then. Fortunately they didn't pull the rug out from under then-current employees and the changes only affected new hires. Fair enough. They will pay me far more in retirement (I hope!) than they ever did when I was working.

When the first change was made everyone was given the option of changing to the new, reduced benefit plan and if they did they would get back 50% of their previous retirement plan contributions. Also your retirement contributions were lower so higher net paycheck. As hard as this was being pushed (a half-day seminar "on the clock") I figured it was a virtual certainty that doing this was not in my best interest so I did not take the bait. Another clue was that changing was irreversible.

A lot of guys took the bait and bought bigger houses, cars, boats, motorcycles, etc. At retirement most had to keep working at other jobs if their spouses didn't also have a retirement income. Me? Most days I sleep until 8:00 or later and every day is a Saturday.

 

[Gumby]

I don't often agree with Megan McArdle, but she is right on the money with this one https://www.bloomberg.com/view/articles/2017-01-03/the-401-k-problem-we-refuse-to-solve

There’s a perpetual pundit debate over the best way to provide for retirement: defined benefit plans (pensions), defined contribution plans (401(k)s, IRAs and the like) or pay-as-you-go social insurance schemes (Social Security). Most retirement experts I’ve talked to prefer a mix of these, a “three-legged stool.” But as I’ve written before, this is a bit like arguing whether the Titanic would have survived the iceberg if only its hull had been painted green. All three types of retirement savings have different costs and benefits. But these costs and benefits are not the primary reason that people in Western countries have to worry about an impoverished old age.

The funny thing is that, for all the people arguing that some dire problem in one of these three retirement systems urgently requires that we switch to another kind at once, the major problem with all three is exactly the same. It’s even a problem that’s easy to state and easy to fix -- no need for extensive blue-ribbon commissions or elaborate white papers. Here’s the solution: Pick whichever system you prefer; it really doesn’t matter. Now slap a 10 to 15 percent surcharge on a worker's wage income, and divert that money into the system for the worker’s future use. Problem basically solved, because in all three cases, the only flaw that actually matters is that they’re badly underfunded.

 

[LOL!]

Well, Megan McArdle missed a good solution: We don't have to put more money in from our own pockets. We can take money from the rest of the world and pay for our retirements.