Participation in defined benefit plans varies by age, with 37 percent of workers ages 43 to 52 participating in 1998, versus 15 percent of workers ages 16 to 32. Participation also varies by workers' earnings, 18 percent of workers earning $30,000 or less participated in a defined benefit plan in 1998, versus 40 percent of workers earning more than $30,000.
Today, traditional defined benefit plans are disappearing. The number of firms freezing, terminating, or otherwise abandoning their pension obligations is increasing. A large number of boomers are losing the benefit of their long years of service and their peak earning years (including any early retirement subsidies) that would maximize their pension benefits. These employees may have made career and retirement decisions based upon the expectation of a certain pension benefit, only to see that expectation disappear - replaced by a defined contribution or cash balance plan under which their age precludes them from earning comparable benefits.
Many companies that do offer pensions are converting to defined contribution plans and workers are absorbing more risk and responsibility for their retirement security. Frequently, workers are ill-equipped to handle this new role, especially those with limited exposure to financial products. Defined contribution plans expose workers to significant investment and longevity risk and their potential role in delivering retirement security is weakened by early withdrawals, low contribution rates, high costs, unsuccessful investment decisions, and failure to annuitize any portion of the account balance upon retirement. So, even if a worker has contributed to a retirement savings plan, it may provide a much less adequate retirement income level than a defined benefit plan.
We need to take the steps necessary to deal with these trends and strengthen the retirement pillar linked to pensions. This could include:
- Providing the financial education necessary to make prudent decisions about savings and investing in the work place since workers have an increased responsibly for accumulating and managing retirement assets.
- Congressional approval of features of an automatic 401(k).
- Providing quality, independent investment advice to workers.
- Establishing a regular payroll deduction mechanism for all workers to save for their future.
- Better diversification, especially for plans with heavy concentrations of employer stock.
- Adopting pension reform legislation that strengthens the defined benefit pension system and the Pension Benefit Guaranty Corporation while protecting the benefits of older workers.
- Expanding the Savers Credit and making it permanent.
The focus of our attention with regard to defined contribution plans has been on encouraging individuals to accumulate sufficient assets to finance a secure retirement. Since many new retirees can expect to live for almost two decades in retirement and many will spend three or more decades in retirement, the challenge will be to find solutions that enable them to manage their assets for a longer time period.