Use It or “Lose” It

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had become a 401(k)), and a pension accrual of…$0.00.

At the time, I didn’t think much about that.  Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss.

By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation—but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there – for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, national tenure data suggest that my job experience was something of an anomaly.  When you consider that median job tenure in the United States  has hovered in the five-to-seven-year range going back to the early 1950s[i], there have doubtless been many private-sector workers who were, for a time, like me, participants in a traditional defined benefit pension plan, only to see little or nothing come of that participation[ii].

I often hear people say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement.  Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation and more, they could provide far less[iii].

In both cases, it’s not the design that’s at fault—it’s how they are used, both by those who sponsor these programs, as well as those who are covered by them.

Nevin E. Adams, JD 

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[i] See “Employee Tenure Trends, 1983–2012” available here.  

[ii] And a great number of private-sector workers never participated in a defined benefit plan.  See “Pension Plan Participation” available here.  

[iii] A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans”.

Tenure, Tracked

Sooner or later as a parent you’ll be told—as you doubtless you told YOUR parents—that “that’s not the way things are now!” It’s a potent retort to whatever social more is at issue because, whether it involves a choice in dress, curfew, or even resumé preparation, our perspectives are often shaped (and sometimes distorted) by our recollection of the way things were for us at comparable points in time. Or, as we must sometimes admit, “the way things used to be.”

When it comes to things like working careers, there is a widespread assumption that past generations worked for a single employer for all, or most of his/her working years, and then retired with a pension and a gold watch. In contrast, current American workers are believed to change jobs (much) more frequently. In fact, many champion the defined contribution plan design as a better “fit” for today’s workforce, which—certainly in the private sector—is seen as lacking the kind of tenure necessary to accrue sufficient benefits under a traditional pension design.¹As it turns out, the latest data on employee tenure from the January 2012 Supplement to the U.S. Census Bureau’s Current Population Survey (CPS) show that the overall median tenure of workers—the midpoint of wage and salary workers’ length of employment in their current jobs—was slightly higher in 2012, at 5.4 years, compared with 5.0 years in 1983.

In fact, as a recent EBRI Notes article points out, the data on employee tenure (the amount of time an individual has been with his or her current employer) show that those so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years.

Looking inside those long-term numbers, different trends emerge. For example, the median tenure for male wage and salary workers was, in fact, lower in 2012, but the median tenure for female wage and salary workers increased (from 4.2 years in 1983 to 5.4 years in 2012). This long-term increase in the median tenure of female workers more than offsets the decline in the median tenure of male workers, leaving the overall level slightly higher over the long term.

When you focus on trends among older male workers (ages 55–64), the group that experienced the largest change in their median tenure during the period covered by the report, median tenure fell from a level that would not normally be considered career-length—14.7 years in 196—to just 10.7 years in 2012.

Ultimately, when it comes to job tenure trends,² the way things look today is remarkably consistent with “the way it used to be.” However, as is often the case, a closer look at the underlying data highlights that even the things we expect to be different aren’t always different in the ways we expect.

Nevin E. Adams, JD

¹ See also “The Good Old Days,” online here.

² The EBRI report highlights several implications of these trends: the effect on defined benefit accruals (even for workers still covered by those programs), the impact of the lump-sum distributions that often accompany job change, and the implications for social programs and workplace stability. “See Employee Tenure Trends, 1983–2012,” online here.