Encouraging Words

 On what turned out to be the longest day of 2024, I said good-bye to my dear 94-year-old mother.

It wasn’t how any of us had planned to spend that day. Two days earlier, she was returning from getting new hearing aids with my sister when she slipped and fell — broke her femur, sending her to the hospital for what was to be a weekend surgery. Mom was amazingly self-sufficient — still living on her own (with some assistance from my sister, who lives nearby) — and she had gone through heart valve replacement and a pacemaker — with COVID in between those two years back.

But this time, as is often the case with older folks, the trauma to her body was more than she could fight off. Thankfully, she managed to hang on until her kids (including this one) and several grandkids were able to get to Chicago to be with her as she went to be with the Lord.    

I moved out — and my parents moved for my Dad’s new job — just as I graduated college.  My parents (and three siblings) lived in a house and a community that I only rarely visited — even less so as my own work and family drew me hundreds of miles away. As a consequence, there was a big chunk of my mother’s life that occurred outside my experience — neighbors, co-workers, and church members. Many of whom had rich and touching stories of the impact Mom had had on their lives.    

Not that Mom and I didn’t talk. After my Dad’s passing in 2006, I committed to calling her every Saturday morning — not always at the same time, and at times (I found later) wresting her out of bed when she, otherwise, probably had been sleeping. We covered a lot of ground on those Saturday mornings — weather, politics, family, investments — and religion. Mom’s faith was the central focus of her life — as the wife of a minister you might expect that — but as have many others of my acquaintance, she had a life — and a profession — outside of the church. 

See, Mom was a teacher from a long line of teachers — what some might think of as the school librarian, though in later years as a “learning center director,” she also became “custodian” and master of the school’s technology investments — video, computers, etc.  It was a skill she relished and nourished — regularly corresponding on email and using her Kindle Fire (and PC) to keep up with photos and YouTube videos. Both her love of books and reading — and technology’s gifts — she passed on to her kids, notably this one. Despite her age, Mom was no luddite, though in recent years the pace of change (the iPhone operating system updates were a particular challenge) was frustrating (and thank goodness for TeamViewer!).

I’ve shared in previous columns the lessons I picked up along the way from Mom (and my Dad, as well). Her decision to set aside money in a 403(b) when my dad insisted they couldn’t afford to (and trust me, it took some sacrifice — that was on top of the 8-10% of pay mandated pension contributions). But she also had the foresight to buy pension credits for the years she stopped teaching to raise a family.

And she, along with my Dad, bought long-term care insurance before it was “cool” (and when it was considerably more affordable) because she didn’t want to be a burden to her family — and had seen first-hand with her parents the financial toll that can take. Mom’s retirement finances — because of the thoughtful and prudent sacrifices my parents made along the way — were comfortable.  Indeed, her retirement income was better than her pre-retirement take-home even after nearly three decades of retirement.

It was, however, her faith that gave purpose to her life. And even when it was no longer safe for her to drive — and COVID kept her home — she believed with all her heart that the Lord’s purpose for her — despite, and perhaps because of those limitations — was to be an encouragement to others.

And so she did — by phone calls, texts, and an astounding amount of “snail mail” — she found ways to reach out, to support and encourage what turned out to be an incredible network of friends, family, church members — even co-workers from three decades ago.  The week she passed those notes were still arriving, encouraging those in her network(s).

I’m already missing my Saturday morning phone calls with Mom. But what a difference we could make in this world if we would all take to heart her “mission” to support and encourage those around us — to provide those “encouraging words” — because you just never know how much difference it could make…

• Nevin E. Adams, JD

10 Pet Peeves About the Retirement Industry

 Life is full of annoyances – all the better to appreciate the blessings that surround us. That said, there are things about the retirement industry that really bug me. 

I recently had the privilege of being part of the Leafhouse National Retirement Symposium. The theme was unfiltered – the unvarnished truth.  And it seemed an appropriate forum to share some of the things about the retirement industry that really bug me. 

Here’s the list:

Using the average or median retirement balance as a proxy for retirement readiness.

Generally speaking, retirement plans are comprised of a myriad of individual circumstances – participants of ages that run from late teens to beyond traditional retirement, savings behaviors based on income – and age – and company match… Not to mention that this might be only a half dozen years of a worker’s accumulation, with the rest on some other recordkeeping platform…

Why any rational person would think that combining those disparate elements and then either dividing them by the number of parts, or looking for some kind of middle grouping – well, it defies logic. And yet, this happens with distressing regularity. It’s worse than mush – it’s a mess – a nonsensical number that is easy to calculate, and completely meaningless. 

Asking people who have never tried to do a retirement needs calculation how much they’ll need for retirement – and then publishing that as an actual target.   

There is perhaps of some modest value in knowing how much people think they need for retirement – even if they have never actually sat down and tried to figure it out. Indeed, in recent weeks at least two major providers have done just that with headlines proclaiming that “magic” number. Setting aside for a moment the reality that it’s completely uninformed – the reality is that we know NOTHING about the incomes, lifestyle, health or residence of the individuals behind that “guess” (though USA Today actually took the time to ascertain the political affiliation of the respondents). 

And since we know nothing about their circumstances – and less about how they derived that number (much less how the uninformed choices of the survey population was construed into that final number) – well, why would anybody care? But while this COULD be a teachable moment – where the survey writers point out that the number might be wildly overblown, and the importance of doing an actual assessment…and then there’s…

Using survey results of people who have never done a retirement needs calculation to “prove” there’s a retirement crisis.

The aforementioned “reports” instead choose to present those “pulled out of their…” guesses as a valid conclusion, and one that not only confirms that (a) there is a retirement crisis (and just in case that point was missed, asking them AFTER they provide a retirement number), but that (b) there’s a crisis precisely because folks are never going to be able to achieve that made up number based on the average savings amount (see above).   

Saying there’s a retirement “crisis” without ever defining what that means.

“Crisis” is a word much bandied about these days, most particularly as a label applied to retirement — by foes and fans alike. Indeed, while not so long ago headlines posed that premise as a question (“Is there a retirement crisis?”), it is now generally posited as a current reality (often accompanied by an exclamation point) — even though an examination of objective data and a clinical application of the term “crisis” suggests otherwise.

For most in the retirement industry, it’s meant as a call to action – built on the notion that time is a valuable asset in helping retirement savings grow. But the dictionary definition is of an event or situation where disaster is imminent – something that calls for immediate, and potentially drastic action. And that is how the critics of the 401(k) see it, as they call for immediate drastic action to replace the 401(k) with some alternative (or to defund the 401(k) in order to build an alternative).  Those who claim there is a retirement crisis without context are, quite simply, fueling their fire.

Pretending that everybody used to have a defined benefit plan/pension – and that those who did received a full pension.

This is a hugely exaggerated myth – actually one built on another – and one invoked with growing frequency by those who claim that the 401(k) is an inferior model. One that was “never intended” to be a full retirement plan unlike its defined benefit pension cousin. What gets overlooked is just how few Americans in the private sector were actually covered by a defined benefit pension (29% at the peak), and even among those who were covered, how few actually worked for that employer long enough to qualify for a “full” pension (something on the order of 12% of those who were covered). 

Quite simply, only a very small minority of individuals (in the private sector) who were covered by a pension actually collected a full pension. If that was a plan design INTENDED to be a retirement plan, it didn’t do a very good job of it for most.

Next time: the rest of the list.

- Nevin E. Adams, JD

What If There Was No ERISA?

 New research puts a new twist on “A Wonderful Life” – answering the question, what if there hadn’t been an ERISA?

ERISA is, of course, the Employee Retirement Income Security Act of 1974 which just turned 50. The analysis[i] – put together by Morningstar Retirement’s Director of Retirement Studies Jack VanDerhei and Associate Director of Retirement Studies Spencer Look – first looks at the current “status quo” retirement readiness impact (more specifically, retirement readiness shortfalls). It then looks at the potential result if there had been no ERISA – or, perhaps more precisely if there had been no individual account retirement plans (defined contribution and IRAs), though allowance was made for the probability of saving to an IRA. 

Now, anyone with a realistic assessment/awareness of the limited availability of traditional pension plans in the private sector (before AND after ERISA’s passage) can hardly be surprised to find that the absence of individual accounts would have a significant negative impact. That said, you might be surprised at the size of that impact. 

The research notes that, when aggregated across all four income categories, the probability of Gen X households running short of money in retirement (granted, this is running short by as little as $1[ii]) would increase from 47% under the status quo to 59%. Millennials would fare worse, with the aggregate probability increasing from 44% to 69%, and Gen Z households would see their exposure soar from a risk of 37% in today’s environment to what the researchers termed a “devastating 72%” without individual account retirement plans. 

The paper also projects the outcomes across various income and education demographics, as well as industry, gender and race. To sum it up, single females, Hispanic Americans, and non-Hispanic Black Americans were found to be at a higher risk of retirement shortfalls. Needless to say perhaps – though the paper does – “[t]he elimination of DC participation and savings would drastically reduce the probability of a successful retirement, particularly for middle-income groups, as they heavily rely on these plans.”

Considering the positive impact of those individual accounts – albeit one limited by the status quo reality of access – it should come as no surprise that a projection that greatly broadens that access – alongside automatic enrollment and auto-escalation (as proscribed in the Automatic IRA Act of 2024) notably improves retirement prospects. Indeed, the researchers find that it could substantially improve retirement outcomes, with an aggregate average wealth ratio increase of 23.8% – and that’s assuming an opt-out rate of 30%![iii]   

All in all, just like good old George Bailey, it’s easy to underestimate the potential impact of the individual account regime that ERISA ultimately fostered – until you are able to imagine what things would be like without it. That said, this research affirms the positive impact – and puts some numbers behind it – while also affirming policy considerations for the future. 

Did I hear a bell ringing…

 - Nevin E. Adams, JD 

---

[i] With a title nearly as long as the paper itself “The Evolution of Retirement-Income Adequacy Under ERISA With a Focus on Defined-Contribution Plans: A Review of the Status Quo, Counterfactual Evidence, and an Analysis of Changes for the Future.”

[ii] Also worth noting, this analysis, unlike most other projection models – takes into account the potential impact of long-term care expenses.

[iii] Which turns out to be close, but less than opt-out rates in a number of the current state-run IRAs.

A Penchant for Pensions?

  I’m not sure how old I was when I first saw “Night of the Living Dead”—but I have long been intrigued by stories of a zombie apocalypse—where mindless beings inexplicably rise from the dead, with no memory of their past, just a relentless (and apparently insatiable) hunger for…well, “us.”

That is perhaps an unfortunate comparison to last week’s hearing by the Senate Health, Education, Labor and Pensions (HELP) Committee, one ostensibly held to focus on how we were going to stave off the retirement “crisis” by…bringing “back”[i] defined benefit plans.[ii]

There were two fundamental premises underlying the hearing; first that there is, in fact, a retirement crisis, and second, that the restoration of defined benefit plan designs would remedy that situation.  

There remains in many circles (including last week’s hearing) a pervasive sense that the defined contribution system is inferior to the defined benefit approach—a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And when it comes to defined benefit plans, it was significantly less than half.

And while you can (eventually) wrest an acknowledgement from those familiar with the data, almost no one EVER talks about how few of even those covered by those DB plans put in the time required to vest in their full pension (particularly prior to the Tax Reform Act of 1986, which accelerated vesting schedules). Those who demonize the 401(k) are never asked to speak to the “coverage gap” that was actually wider when defined benefit structures were “in vogue,” nor called for an accounting of the shortfall between the actual benefits delivered versus the “promise.” And yet, those 401(k) critics in last week’s hearing—with a straight face—held forth on how much better things would be…if only defined benefit plans would come back.

Don’t get me wrong—defined benefit plans continue to serve a valued societal purpose (not the least of which the income they provide my 93-year-old mother, though given the state’s finances, she remains concerned how long they will last), though they tend to work “better” in the public sector and among unionized workforces, where one’s profession and job tenure tend to be less volatile. That said, it’s not like there was some kind of cataclysmic event that wiped them out overnight in the private sector. Rather, their demise was one of a hundred painful “cuts”—all well-intentioned, of course. 

There were (and are) premiums to provide insurance backing for plans that “fail,” disclosures to try and avoid (unexpected) failures, demands for a full accounting of the potential financial obligations those plans represented for the organizations that sponsor them, and finally a demand that those financials be moved from footnotes to the corporate balance sheet itself. At any number of points along that continuum, one could well understand and appreciate why employers would choose to step away from that burden—and they did. 

Moreover, with few exceptions they were able to do so without opposition from employees—who typically didn’t (and largely still don’t) appreciate the cost or benefit of a promise that won’t come to fruition until years, if not decades, beyond the date they expect to be employed by the firm making that promise. And that ignores a criticism highlighted by several in the hearing—that these programs aren’t always well-managed or funded to provide those promised benefits.         

Yes, a fully funded, fully vested benefit that you’ve paid nothing for is certainly a good thing. Little wonder that a recent survey (by one of those firms represented at the hearing) suggested a massive public clamoring for the alleged panacea of these programs. And considering the plethora of headlines proclaiming the dire straits of today’s retirees, who can be faulted for clinging to a benevolent notion of a simpler time when someone else worried about such things?

All that said, there was little in the way of actual data at the hearing to suggest that a return of DB (certainly at the expense of the 401(k)) would actually resolve the issues. Mostly the witnesses focused on the alleged shortcomings of the current system (albeit with some sharp differences in conclusions, and a brief debate about the different results one gets from actual data versus surveys reliant on what people think in terms of establishing whether or not there is an actual crisis), alongside some optimism that SECURE and SECURE 2.0 had laid the groundwork for potential improvement in coverage, sufficiency and decumulation options. If there was a consensus, it might have been that we need to address the projected shortfalls in Social Security benefits—and, truly, if that isn’t, then we really will be looking at a crisis.

The thing that makes cinematic zombies so terrifying is that there are so many of them—and that they keep getting up and pursuing you no matter how much damage you inflict.[iii] That, and they manage to “convert” more with a simple bite. Let’s face it—a truly serious look at the retirement “crisis” would acknowledge that under traditional vesting definitions and job turnover rates in the private sector, defined benefit designs are, at best, a dubious solution. 

A penchant has been described as an irresistible attraction, as someone having a “penchant” for taking risks. 

A more practical one would be to look at a system that is already in place and working for those with access—and talk about ways to make THAT reality a reality for all.

- Nevin E. Adams, JD

 

---

[i] In fairness, there are still defined benefit plans about, even in the private sector—though they are considerably fewer than they were a generation ago, and many are frozen or in termination status. 

[ii] The hearing was titled and you can still listen to a recording of it here, "Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers."

[iii] Well, except for the occasional well-placed headshot.

Happy Birthday, ERISA!

Pensions were not on my mind in 1974, certainly not on Labor Day of that year. 

While I was pondering my new college textbooks (and trying to figure out how I was going to pay for $.55/gallon gasoline), President Gerald R. Ford, less than a month in that role—and, appropriately enough on Labor Day, signed into law the Employee Retirement Income Security Act of 1974—better known to most of us as ERISA.

Little did I know at the time that that law—and the structure it provided to the nation’s private pension system—would, in the years to follow, play such an integral role in my life. And yet, in a wide variety of positions, and a handful of different organizations and locations, from that first college internship in 1977 to—well, today—retirement has been my career.

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974. A major motivation for ERISA was the termination of the Studebaker[i] pension plan for its hourly workers in 1963.  At the time, the plan covered roughly 10,500 workers, 3,600 of whom had already retired and who—despite the stories you sometimes hear about Studebaker—received their full benefits when the plan was terminated.

However, some 4,000 workers between the ages of 40 and 59—didn’t. They only got about 15 cents for each dollar of benefit they had been promised, though the average age of this group of workers was 52 years with an average of 23 years of service (another 2,900 employees, who all had less than 10 years of service, received nothing). And so, armed with the real life example of those Studebaker pensions, highlighting what had been a growing concern about the default risk of private sector plans (public sector programs weren’t seen as being vulnerable to the same risk at that time)—well, it may have been a decade before ERISA was to become a reality, but the example of Studebaker’s pensions provided a powerful and on-going “real life” reminder of the need for reform.

In fact, ERISA was designed to regulate what was there and would yet come to be—to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards. And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”? Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.” Today, that system has grown to exceed $12 trillion (and another 11.5 trillion in IRAs, much of which came from that private retirement system), covering more than 97 million active workers (142 million in total) in more than 746,000 plans. 

The composition of the plans, like the composition of the workforce those plans cover, has changed significantly over time. While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when (people act like) everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. Indeed, the Labor Department recently reported that plans disbursed $266 billion more than they received in contributions[ii] during 2020.

Forty-nine years on, ERISA—and the nation’s retirement challenges—may yet be a work in progress. But it’s hard to imagine American retirement without it, and the individuals who gave it “birth.” 

Happy birthday, ERISA!

- Nevin E. Adams, JD 

---

[i] I’d wager that a majority of Americans have never even heard of a Studebaker, and the notion that a major U.S. automobile maker once operated out of South Bend, Indiana would likely come as a surprise to most. The Studebaker brothers (there were five of them) went from being blacksmiths in the 1850s to making parts for wagons, to making wheelbarrows (that were in great demand during the 1849 Gold Rush) to building wagons used by the Union Army during the Civil War, before turning to making cars (first electric, then gasoline) after the turn of the century. Indeed, they had a good, long run making automobiles that were generally well regarded for their quality and reliability (their finances, not so much) until a combination of factors (including, ironically, pension funding) resulted in the cessation of production at the South Bend plant on Dec. 20, 1963.

[ii] Though in total, contributions (DB and DC) increased by 3.2%, to $694.2 billion.

 

Leaving a Legacy

As Father’s Day approaches, I’ve been thinking about my dad, the life he led, the choices he made, and the legacy he left behind.

I’m not talking about money. In fact, I didn’t learn anything about finance from my dad—he avoided big purchases with the fervor of Ebenezer Scrooge, though he’d spend that much (and more) on small things (mostly books). Like many in his generation, my dad wanted to hold the checkbook, but it was Mom who always made sure that there was money in the account. Dad tithed “biblically,” but Mom was the one who started setting aside money from her paycheck in her 403(b) plan at work—and continued to do so, even when my father was convinced they couldn’t afford it—and made no secret of that opinion. Or did until he got a glimpse of the statement that showed Mom’s retirement account growth—and then, inspired by that example—he began setting money aside for retirement as well.

My dad was a man of few words—spoken words, anyway. At 6’ 5” he was an imposing figure, all the more from the pulpit from which he did speak. He was a good speaker, but not a natural one. He worked hard at it, studied his subject matter, practiced his presentation relentlessly, each and every week. I always thought it amazing that such a quiet, introverted man would choose that career—but it was something he felt called to do at an early age, though it can’t have been easy. He had opinions, but didn’t impose them on others. Indeed, it was difficult (and sometimes frustrating) to wrest opinions from him. Significantly, he walked his “talk”—his faith, his love and respect for all people, even those with whom he disagreed—and those were attributes in short supply, even then.

Though I talked about my work any number of times over the years, for much of my working life, I don’t think my dad ever really understood what I “did.” Oh, he knew I worked for banks (when I did), figured that being a “senior vice president” had to be a good thing, knew that I had something to do with pensions, and (eventually) grasped that it also had something to do with something called a 401(k). But as for understanding what I actually did every day—well, he cared mostly that I enjoyed the work, that I found meaning in my chosen field, that I was able—or felt I was able—to make a difference.

While Dad touched a lot of people with his ministry, he touched thousands more with what was a random, almost accidental opportunity. Back in 1972 he was asked by a friend to take on the writing of 13 guest columns in a denominational paper—an “opportunity” that went on for more than three decades (alongside his “day job”). In fact, one of the great joys of my life was when, 20 years into this retirement industry career, I was also presented an “opportunity” to begin writing for a living—and my dad, though he didn’t always understand what I was writing about, could appreciate that I was—eventually—following in his (writing) footsteps.

His impact on me, and my life notwithstanding, I’m a different person than my dad, though his example is never very far from my thoughts. As a parent, I’ve tried to share with my kids the lessons I’ve learned (and continue to learn), tried to spare them the pain that came with many of those, but also tried to give them the room they need—and deserve—to learn their own on the life path(s) they chose, though that’s a life lesson of its own, and one with which I still sometimes struggle.

Along the way, I’ve tried to make a point to tell them—regularly—how proud I am of them. But mostly I try not only to tell—but to show them—how much I love them—and to do so as often as I can.

Because while there’s a lot we can leave behind—there’s nothing like a living legacy.

- Nevin E. Adams, JD

The Birth of a Notion

"Unintended consequences” are generally a bad thing. But not always. The 401(k), for example.

This week we celebrated the birthday of the 401(k) – because it’s the anniversary of the day on which the Revenue Act of 1978 – which included a provision that became Internal Revenue Code (IRC) Sec. 401(k) – was signed into law by then-President Jimmy Carter.

That wasn’t the “point” of the legislation of course – it was about tax cuts (some things never change) – reduced individual and corporate tax rates (pulling the top rate down to 46% from 48%), increased personal exemptions and standard deductions, made some adjustments to capital gains, and – created flexible spending accounts. But it did, of course, also add Section 401(k) to the Internal Revenue Code.

That said, so-called “cash or deferred arrangements” had been around for a long time – basically predicated on the notion that if you don’t actually receive compensation (frequently an annual bonus or profit-sharing contribution in those times/employers), you don’t have to pay taxes on the compensation you hadn’t (yet) received. That approach was not without its challengers (notably the IRS) and, according to the Employee Benefit Research Institute (EBRI), this culminated in IRS guidance in 1956 (Rev. Rul, 56−497), which was subsequently revised (seven years later) as Rev. Rul. 63−180 in response to a federal court ruling (Hicks v. U.S.) on the deferral of profit-sharing contributions. Enter the Employee Retirement Income Security Act of 1974 (ERISA), which – among other things – barred the issuance of Treasury regulations prior to 1977 that would impact plans in place on June 27, 1974. That, in turn, put on hold a regulation proposed by the IRS in December 1972 that would have severely restricted the tax-deferred status of such plans. But ERISA also mandated a study of salary reduction plans – which, in turn, influenced the legislation that ultimately gave birth to the 401(k).

So, how did something that became America’s retirement plan get added to a tax reform package? Rep. Barber Conable, top Republican on the House Ways & Means Committee at the time, whose constituents included firms like Xerox and Eastman Kodak (which were interested in the deferral option for their executives), promoted the inclusion which added permanent provisions to “the Code,” sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980, and regulations were issued Nov. 10, 1981 (which has, at other times, also been cited as a “birthday” of the 401(k)).

Now, it’s said that success has many fathers, while failure is an orphan. The most commonly repeated story is that Ted Benna saw an opportunity in this new provision, recommended it to a client (which, ironically, rejected the notion), but then promoted it to a consulting firm (Johnson & Johnson), which then embraced it for their own workers. The reality is almost certainly more nuanced than that, though Mr. Benna (who now derides what he ostensibly created) has managed to be deemed the “father” of the 401(k) by just about every media outlet in existence (it may be worth noting that while I am the father of three children, their mother was much more involved in the actual delivery).

What we do know is that in the years between 1978 and 1982, a number of firms (EBRI cites not only Johnson & Johnson, but FMC, PepsiCo, JC Penney, Honeywell, Savannah Foods & Industries, Hughes Aircraft Company and a San Francisco-based consulting firm called Coates, Herfurth, & England) began to develop 401(k) plan proposals, many of which officially began operation in January 1982.

Within two years, surveys showed that nearly half of all large firms were either already offering a 401(k) plan or considering one. Two years later the Tax Reform Act of 1984 (again, among other things) interjected nondiscrimination testing for these plans – and two years after that the Tax Reform Act of 1986 tightened the nondiscrimination rules further, and reduced the maximum annual 401(k) before-tax salary deferrals by employees. And yet, despite those – and a number of other significant changes over the intervening years – employers have continued to offer – and America’s workers have continued to take advantage of these programs.

Now, it’s long been said that 401(k)s were never intended (nor designed) to replace defined benefit pensions – true enough.

However, in 1979, only 28% of private-sector workers participated in a DB plan, with another 10% participating in both a DB and a DC plan. In contrast, the Investment Company Institute notes that, among all workers aged 26 to 64 in 2014, 63% participated in a retirement plan either directly or through a spouse. As of June 2018, Americans have set aside nearly $8 trillion in defined contribution plans, and there’s another $9 trillion in IRAs, much of which likely originated in DC/401(k) plans.

Those who know how defined benefit (DB) plan accrual formulas work understand that the actual benefit is a function of some definition of average pay and years of service. Moreover, prior to the mid-1980s, 10-year cliff vesting schedules were common for DB plans. What that meant was that if you worked for an employer fewer than 10 years (and most did), you’d be entitled to a pension of … $0.00. And, as you might expect, certainly back in 1982, even among the workers who were covered by a traditional pension, many would actually receive little or nothing from that plan design. But then, certainly in the private sector those plans were funded, invested (and paid for) by the employer. Nothing ventured,¹ nothing gained, right?

The reality is that the nation’s baseline retirement program is, and remains, Social Security. But for those who hope to do better, for those of even modest incomes who would like to carry that standard of living into post-employment, the nation’s retirement plan is, and has long been, the 401(k). 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.

That may not have been the intent of the architects of the 401(k), or its assorted foster “parents” over the years. But these days it’s hard to imagine retirement without it.

So, happy 40^thbirthday, 401(k). And here’s to 40 more!

Nevin E. Adams, JD

I know that some would argue that workers effectively bargained for lower wages in return for the pension benefit. Maybe once upon a time, certainly in labor situations where there actually was an active bargaining component. But I suspect that most non-union private sector workers post-ERISA felt no such trade-off. ↩

A "Real Life" Example

In addition to the books, reference guides, and a few personal “knick knacks,” I have for years had in my office a couple of model cars – but not for the reason people generally think.

These models happen to be Studebakers (a 1950 Champion, a 1953 Starliner and a 1963 Avanti). I’d wager that a majority of Americans have never even heard of a Studebaker, and the notion that a major U.S. automobile maker once operated out of South Bend, Indiana would likely come as a surprise to most. I keep them in my office not because I have an appreciation for classic cars (though I do), but because of the role the automaker played in ERISA’s formation.

Born into a wagon-making family, the Studebaker brothers (there were five of them) went from being blacksmiths in the 1850s to making parts for wagons, to making wheelbarrows (that were in great demand during the 1849 Gold Rush) to building wagons used by the Union Army during the Civil War, before turning to making cars (first electric, then gasoline) after the turn of the century. Indeed, they had a good, long run making automobiles that were generally well regarded for their quality and reliability (their finances, not so much) until a combination of factors (including, ironically, pension funding) resulted in the cessation of production at the South Bend plant on Dec. 20, 1963. Shortly thereafter Studebaker terminated its retirement plan for hourly workers, and the plan defaulted on its obligations.

At the time, the plan covered roughly 10,500 workers, 3,600 of whom had already retired and who – despite the stories you sometimes hear about Studebaker – received their full benefits when the plan was terminated. However, some 4,000 workers between the ages of 40 and 59 – didn’t. They only got about 15 cents for each dollar of benefit they had been promised, though the average age of this group of workers was 52 years with an average of 23 years of service (another 2,900 employees, who all had less than 10 years of service, received nothing).

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974, as the workers at Studebaker surely knew (they certainly had reason to – Studebaker-Packard had terminated the retirement plan for employees of the former Packard Motor Car company in 1958, and they got even less than the Studebaker workers wound up with in 1964). But armed with the real life example of those Studebaker pensions, highlighting what had been a growing concern about the default risk of private sector plans (public sector programs weren’t seen as being vulnerable to the same risk at that time) – well, it may have been a decade before ERISA was to become a reality, but the example of Studebaker’s pensions provided a powerful and on-going “real life” reminder of the need for reform.

Has ERISA “worked”? Well, in signing that legislation – 43 years ago this past weekend – President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.” His words were prophetic; today that system has grown to exceed $17 trillion, covering more than 85 million workers in more than 700,000 plans.

The composition of the plans, like the composition of the workforce those plans cover, has changed considerably over time, as has ERISA’s original framework. Today much is made about the shortcomings in coverage and protections of the current system, the projections of multitrillion-dollar shortfalls of retirement income, the pining for the “good old days” when everyone had a pension (that never really existed for most), the reality is that ERISA – and its progeny – have unquestionably allowed more Americans to be better financially prepared for retirement than ever before.

It’s a real life example I think about every time I look at those model cars – and every time I have the opportunity to explain the story behind them.

- Nevin E. Adams, JD

6 Things Boomers Need to Know About Saving for Retirement

Several weeks back, I wrote a column entitled, “5 Things Millennials Need to Know About Saving for Retirement.” But what about those at the brink of retirement?

Retirement seems close — perhaps too close for the comfort of Boomers, some of whom have already begun cycling into retirement. In fact, the youngest element of this cohort (born in 1964) is now already 51, and it’s said that 10,000 Boomers roll into retirement every day.

That said, whether you’ve been saving or not, or not saving enough — here are six things Boomers need to know about saving for retirement.

1. Social Security won’t be as much as you think it will be.

When you were your kids’ age(s), you too were likely disdainful about the long-term prospects for Social Security (and hey, your kids weren’t around for the real funding crisis back in the early 1980s!). That said, you’re not only close enough to collecting; many of you are probably in the age group where when politicians talk about making changes, they’re careful to assure you that yours won’t be changed.

However, even if one assumes that the program remains largely unchanged from what it pays today, if you retire at full retirement age in 2015, your maximum benefit would be $2,663 a month, according to the Social Security Administration. Those who retire at age 62 (and many of today’s workers do, not realizing that waiting can translate into larger benefits) in 2015, your maximum benefit would be $2,025; and if you retire at age 70 in 2015, it would be $3,501.

Now those amounts are based on earnings at the maximum taxable amount for every year after age 21. In other words, that’s probably more than most of us would get. In fact, the average monthly Social Security retirement benefit for January 2015 was $1,328. Note that the maximum benefit depends on the age a worker chooses to retire, among other things — and that assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.

2. Not everyone has a pension, and you probably don’t. And if you do, it probably isn’t a full pension.

Now, by “pension” I mean the traditional defined benefit (DB) pension plan, one that, in the private sector anyway, was largely employer funded. According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2011, just 3% of all private-sector workers participated only in a DB plan, and 11% had both a defined contribution (DC) plan and a DB plan. So, only something like 14% of workers in the private sector still have a traditional pension plan (even then, it doesn’t mean there’s no reason for concern; see “3 Pervasive Retirement Industry Myths”).

That said, you’ve been in the workforce long enough (and during the right time) that you might actually have a pension, or at least a piece of one. Here’s the thing: People talk like the Millennials invented rapid job turnover, but the reality is that job tenure statistics have been relatively consistent going all the way back to the 1950s. What that means is that lots of workers who were “covered” by a pension plan didn’t work at those employers long enough to vest in that pension, or at least not long enough to vest fully. So, look back through your work history, check and see if those employers offered a pension. And you might want to check out thismissing pension tool from the Pension Benefit Guaranty Corporation (PBGC).

3. You won’t be able to work as long as you think.

I’m sure there are days when you would love nothing more than to be able to stay in bed (or at least not go to work). But industry surveys continue to suggest that not only do people expect to work longer, their retirement savings calculations seem to depend on it.

You hear people talk about 65 as the “normal” retirement age, even though it’s no longer that, even for Social Security benefits (aside from the reality that many still start collecting at age 62, unless you were born before 1943, your normal retirement age is 66 or older — you can check yours out here.)

Meanwhile, EBRI’s Retirement Confidence Survey (RCS) has consistently found that a large percentage of retirees leave the workforce earlier than planned — 49% of them in 2014, for example. Many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%), though some state that they retired early because they could afford to do so (26%).

The bottom line: You probably shouldn’t count on being able to work as long as your finances may require. And that may require cutting back in the here-and-now in the interests of the there-and-then.

4. You could be missing out on ‘free’ money.

When you started working, if your employer offered a DC plan, you had to fill out a form in order to participate (you probably even had to wait a year), make investment choices, etc. These days a growing number of employers automatically enroll eligible workers in these plans, direct their savings into a default investment alternative, and even automatically increase that initial deferral rate each year. But even among those employers, most only automatically enroll new hires, not existing hires. And that could mean that even if you work for one of those employers, you might have been overlooked by these “auto” enrollment programs — and you might still need to go get one of those enrollment forms (or visit the plan’s website).

Your savings may well be matched by your employer (see “6 Things 401(k) Participants Need to Know”), so even if you’ve missed out on years of the opportunity to save and have those savings matched, there’s no time like the present to start — and start as aggressively as you can. After all, time is — literally — money.

5. You can use catch-up contributions to catch up.

Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make annual catch-up contributions; up to $6,000 in 2015 and 2016 may be permitted by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs, as well, but the limits are much smaller). The bottom line: If you haven’t saved enough, these catch-up provisions can help. You can find out more here.

6. It’s not too late to start.

The reality is, without a sense of where you stand, what resources you have available, what your needs are and how long you have to prepare, it’s impossible to figure out the best way forward. But it starts with figuring out how much you’ll need. And for that, you might check out EBRI’s Ballpark E$timate — it’s free and easy to use. Then gather up those 401(k) statements, those IRA accounts, check for missing pension balances, and start saving!

- Nevin E. Adams, JD