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After watching the ups and downs of the stock market take a toll on our 401(k)s, the idea of a traditional pension might sound pretty good.
These old-school retirement plans offer a guaranteed paycheck in retirement. Your payoff isn't determined by how much you contribute, how well you invest or what happens to the Dow. When you have a pension, it's up to your employer to make sure you get the money, and the federal government stands by as a backup in case your company screws up.
Unfortunately, only one in five workers today is covered by a traditional pension and these plans are getting rarer by the day. Far from enjoying a renaissance as workers realize the drawbacks of 401(k)s, pension plans will almost certainly continue their long, slow slide.
So what's killing them?
- Their cost, for starters. Stock market losses meant many companies had to make big payments to their pension funds for the first time in years.
- Huge changes in our economy. The big manufacturing companies that traditionally provided pensions are being replaced by service companies that have opted instead for 401(k)s.
- High turnover. Pensions reward people who work for one company for a long time. With more people job hopping and job tenure shrinking, portable plans like 401(k)s became more popular.
- A disconnect between management and workers. Before the 1970s, the same pension plan might cover the CEO and the janitor. Today, the CEO's retirement money is managed separately, reducing the incentive to keep pensions going.
- And finally, in a small way, maybe you. . . for not recognizing the benefits of a guaranteed pension until recently.
Pensions aren't going to disappear entirely. The big unions, which understand the value of a pension, aren't about to let this benefit go without a fight. So the large, unionized industrial companies that provide most pensions likely will continue to do so, for now.
It's the smaller company plans with non-union work forces that are more likely to modify or end their pension programs, says pension expert Steve Vernon. And few companies that don't already have them are likely to start, says Vernon, who works for compensation consulting firm Watson Wyatt & Co.
Propping up ailing pension plans
Companies that have plans will be forced to inject more money into them to offset stock market losses, says Ronald Ryan, head of pension tracking firm Ryan Lab Inc. Ryan and other analysts predict pension fund contributions will lead to lower earnings for many companies in coming years.What companies hate even more than the cost of pension funds, benefits experts say, is their unpredictability. Big swings in funding make planning for the future difficult.
Contrast that with the 401(k), which shifts the burden of retirement investing to the worker. Company contributions to 401(k)s don't vary that much and don't obligate the employer to make up for stock market losses. Employers also don't have to pay insurance premiums to the Pension Benefit Guaranty Corp., the quasi-government agency that guarantees retirement benefits if companies go bankrupt or otherwise can't cover pension checks.
It would be easily to conclude, then, that the 401(k) killed the traditional pension. But of course it's more complex than that.
Congress may have fired the first shot in the 1970s with laws that were actually intended to strengthen and protect pensions. The Employee Retirement Income Security Act, or ERISA, which became law in 1974, also introduced rules that prevented pension plans from giving outsized benefits to top management. (Among other restrictions, ERISA capped the amount of compensation that could be taken into account when determining pension checks.)
Instead of scaling down benefits to executives, however, most companies simply set up separate programs to benefit their highest-paid workers. That started a disconnect between workers and management, argues benefit expert Ted Benna, that continues to this day and that has erupted in scandals about overpaid executives with lavish benefit plans.
"The ones at the top always manage to take care of themselves," argues Benna, who is widely known as the inventor of the 401(k).
Now, you'd expect Benna to be sensitive about the idea that the 401(k) killed pensions. But he has a point. Since ERISA, a whole industry of benefits consulting has emerged with the sole goal of finding ways to channel benefits to a corporation's best-paid workers -- through massive deferred compensation programs, monster severance packages and life insurance programs that channel tens of millions of tax-deferred dollars to an executive's heirs.
Meanwhile, traditional pensions are dying on the vine.
Taking responsibility
As workers, we also need to take some responsibility for this trend. How many of us even ask whether a prospective employer provides this valuable benefit? Chances are you were far more interested in the company's 401(k), if you bothered to inquire about retirement plans at all.Currently, only 6% of employees polled by the Employee Benefit Research Institute say traditional pensions are the most important benefit, compared to 23% who rank 401(k) plans that way. (More than half say health benefits are the most essential benefit.)
Pension attorney Dianne Bennett says she has a tough time convincing new employees of the value of the traditional pension her law firm offers. They're far more interested, even now, in how the 401(k) works.
The 401(k) most likely will be worth less in the long run, Bennett says. As an employer, however, it's hard to justify the cost of a benefit workers don't appreciate.
A little more worker interest in pensions might convince some wavering employers that it's worth keeping these plans to attract good employees. In tough economic times, your enthusiasm might not be enough to change your company's mind. But your indifference certainly won't help matters.
Three ways to make a difference
What should you do? Try the following:- Investigate. Find out if your company offers a traditional pension, also known as a defined benefit plan, and ask how it works. Your human resources department or your union should be able to help you. You should also be able to get an estimate of how much your pension check will be if you stay with your company for varying lengths of time.
- Educate. Inform yourself and your colleagues about your plan as well as any possible changes your employer might propose. Some companies are switching from traditional pensions to so-called cash balance plans, which are more portable but which can also limit or reduce benefits for older workers. Others are freezing plans, which means you'll get the benefits you've already earned, but no more.
- Advocate. Protests by informed workers have successfully modified pension changes at some companies, including at IBM, so it could pay to be active.
You can also advocate by letting employers know you value pension benefits. The next time you're looking for a job, for example, ask about whether a pension is offered. As Bennett said, a pension check for life might turn out to be worth far more than whatever you could save in a 401(k). A smart worker will want to look for jobs that offer both.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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