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.

- Nevin E. Adams, JD

Footnotes

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.