The pension: that rare pension benefit gets a fresh look

In an economy characterized by a volatile stock market and high inflation, things are certainly looking better than ever. For some Americans currently in the workforce, that looks like a retirement.

Striking members of the United Automobile Workers union caused an uproar this year when union leaders demanded the reopening of defined benefit plans for workers hired after the end of 2007. Although the UAW leadership failed to convince automakers to reopen the plans, the bold move did not. go unnoticed by pension benefits experts.

“It was interesting that UAW mentioned that in their negotiations because you wouldn’t really have seen that 10 years ago,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, a nonprofit organization.

Only about one in ten Americans currently working in the private sector participate in a defined benefit plan, while roughly half contribute to 401(k)-type defined contribution plans, which are funded with their pre-tax dollars and, in many cases, , employer contributions.

Experts say the shortcomings of defined contribution plans, where assets are invested by employees themselves, are becoming more apparent in the current economic climate.

“A lot of American workers are seeing that it’s a lot harder to make those accounts work,” said Josh Cohen, head of client solutions for PGIM DC Solutions, a division of Prudential Financial. “This is further reinforced by market volatility, inflation and longer lifespans.”

The competitive job market has led more job seekers to look for employers who offer richer benefits. Jobs platform Indeed found that the number of people looking for work has increased the search for a pension by about 12 percent over the past three years.

There are indications that companies are becoming more responsive. We also found that while the number of job postings mentioning pensions remains low, this figure has increased by around 130 percent over the past three years.

Even before the pandemic and its economic turmoil, there was evidence that workers—including young Americans who became dominant in the labor market after 401(k)s—placed a high value on defined-benefit pensions. A report published in 2020 by the National Institute on Retirement Security found that more than four in five millennials working in the public sector cited pensions as a key reason for staying in their jobs.

Jobs platform Glassdoor found that employers with pensions had an edge over competitors in employee satisfaction, which can improve recruitment and retention. Employers offering pensions have consistently received higher ratings on the site over the past decade. Benefit figures for jobs with pensions averaged 4.37 out of a possible 5, compared to 4.21 for jobs without pension benefits.

“I would characterize that as a pretty big and sustained benefit,” said Daniel Zhao, chief economist at Glassdoor.

For Jessica Steinbach, the chance to take a job with a pension straight out of college was a “great opportunity.”

Although Ms. Steinbach, 27, has an associate degree in performing arts, she works as an assistant naturalist for the Dutchess County Parks Department in New York’s Hudson River Valley, where she directs educational programs for children and adults.

Ms. Steinbach said her parents helped her from an early age to see the long-term benefit of joining a retirement plan.

“My parents said the stability of a county job with a pension would be great,” she said. “They indicated how rare that is.” Her peers also find it surprising.

She said seeing her parents closer to retirement gave her a better long-term perspective. “Thirty years isn’t that long, and it’s crept up on them, so it’ll sneak up on me too,” she said, adding that she appreciates the guarantee of an additional income stream to supplement Social Security when she’s older. “It does feel a little more stable to have the pension.”

While pensions are still common in public sector jobs, they are virtually absent in the private sector. But there are indications that the tide could be turning.

In November, IBM announced a major change in the way it structures its retirement benefits. The company is a major force in American business. It was one of the first to offer a 401(k) plan in 1983. IBM will maintain its 401(k) plan, but will eliminate matching contributions of up to 6 percent starting next year. Instead, it will contribute 5 percent of each employee’s wages to a defined benefit instrument.

This retirement benefit account, as the company calls it, differs from traditional defined benefit pensions in that its structure is that of a cash balance account, where the accrued value is expressed in a dollar amount. Employees earn credit each year, usually a percentage of their salary plus an interest rate tied to a benchmark, such as a certain yield on government bonds.

“To me, this is a bit of a back-to-the-future move, with IBM going back in time in a sense,” said John Rekenthaler, vice president of research at investment research firm Morningstar. “It’s a different structure, but it has a bit of an old-fashioned feel to it.”

Employees who don’t currently contribute to a retirement account will likely see the biggest benefit from this move, says Michael Archer, head of the North America retirement practice at WTW, an employee benefits consulting firm.

“Defined contribution plans most require the employee to contribute in order to get a contribution from the employer, but the problem with that typical approach is that many employees who are lower paid or younger find it very difficult to make that contributions,” said Mr Archer. said.

Conversely, a major disadvantage of traditional defined benefit pensions is that they are structured to reward workers who spend their entire careers with the same employer – a career model that is not particularly suitable for today’s young, mobile workforce.

Defined benefit plans structured as cash-balance plans, like IBM’s, allow employees to consistently build money for retirement without the need for tenure over decades. “Cash balance plans are designed to increase portability, so you can withdraw a lump sum when you leave,” says Jared Gross, head of institutional portfolio strategy at JP Morgan Asset Management.

Another disadvantage from traditional Defined benefit pensions mean that payments stop when the employee – or the employee’s spouse – dies. Although employees with 401(k)s run the risk of outliving their savings, they can designate a beneficiary to receive the money after their death.

One possible solution, pension experts say, is for companies to offer a kind of hybrid pension package that includes both defined benefits and fixed contributions. In a report co-authored by Mr Gross and published this year by JP Morgan Asset Management, analysts suggested that large companies with dormant pension schemes – which are closed or still paying out to older retirees but inaccessible to younger workers – could benefit from this benefit from the reopening. or releasing these plans as a supplement to a defined contribution plan.

“I think the likely path is that this is an addition to a D.C. plan,” Mr. Gross said. “What we will probably see in the future is a parallel structure.”

While economists point to signs of slowing momentum in the labor market as potential evidence that workers’ retirement gains may be short-lived, they also note that the continued retirement waves of baby boomers mean that employers will have to compete more fiercely to hire and retain workers. retain.

“Structurally, the long-term trend is that workers will become more valuable, especially when we think about the types of industries that will need more workers in the future,” said Mr. Zhao, the Glassdoor economist. He noted continued strength in industries, such as healthcare, that rely on in-person work that cannot be automated or outsourced.

“When you go through periods of volatility or inflation,” Mr. Gross said, “or for people who are concerned about the adequacy of their retirement savings, the perception of defined benefit plans increases because they provide stable long-term income. ”

Two additional concerns – the viability of Social Security and rising national debt – weigh on the minds of young workers and investors today, and the prospect of guaranteed returns is becoming increasingly attractive.

“With this shift in this higher inflation environment, more and more people are becoming aware of what it will cost to retire,” said Ned McGuire, director of investment advisory firm Wilshire. “Employees are starting to realize that pensions are unpredictable and potentially very expensive.”

There are indications that young adults are increasingly concerned about the reliability of social security. In a Nationwide Retirement Institute survey, 45 percent of adults under age 27 said they did not believe they would receive money from the program.

“When you’re 20 years old and you’re looking at your future lifespan, you don’t necessarily know that you’re going to receive Social Security benefits at the same level as your parents,” Mr. McGuire said. “It’s just so much more in the spirit of the times.”