The younger you are, the less retirement security you’re likely to have, as employers accelerate efforts to shed costly pensions and replace them with alternatives that make workers shoulder more of the risk and responsibility.
Why it matters: Millennials and members of Generation Z will face less prosperous golden years than their parents, given the retirement accounts they get now — unless they are diligent about allocating money, investing it wisely, and not blowing it when they gain full access.
The backstory: Companies have long been moving away from traditional pensions, where retirees are guaranteed a certain level of benefits, and replacing them with 401(k)s and other retirement savings accounts, which are more vulnerable to the ups and downs of the stock market. But lately, those changes are happening even faster.
What’s happening: A perfect storm of circumstances, from lower interest rates to higher longevity rates, is prompting corporations to offload their pension plans — by selling them to insurance companies and offering lump-sum payments to some workers.
- Deal volume in the “pension risk transfer” business, in which a big company like Lockheed Martin or FedEx sells all or part of its pension obligations to an insurer like Prudential or Metropolitan Life, was the biggest ever in 2018, and is on track to be bigger still this year.
- The insurance company pays retired workers an annuity that is equal in value to the pension they’ve earned, but the workers lose certain safeguards, like the backstop of the Pension Benefit Guaranty Corporation, the agency that steps in if a company can’t pay.
- “Companies are looking to get those defined benefit plans off their books,” Robert Falzon, vice chairman of Prudential, tells Axios. “It’s a multi-trillion dollar market that will continue for some period of time.”
If your pension is sold to an insurance company, there are “potentially terrible consequences,” Norman Stein, a law professor at Drexel University and policy advisor to the Pension Rights Center, tells Axios.
- “What happens if the insurance company gets into trouble?” he said. “What happens if you find out that your benefit was miscalculated and you’re entitled to more than the company sold your pension for?”
By the numbers: Among Fortune 500 companies, only 81 sponsored a pension plan in 2017, down from 288 in 1998, according to Prudential.
- At the same time, the number of pension risk transfer deals rose to 493 in 2018 from 203 in 2012, according to the LIMRA Secure Retirement Institute, a nonpartisan research center.
- In the public sector, many pension plans are dangerously underfunded.
Between the lines: 401(k)s and other defined contribution plans are cheaper for the firms than pensions and more onerous for the employees. Consumer advocates say that the swapping pensions for 401(k)s is a raw deal for workers — particularly in an uncertain economy.
- When the next recession hits, a falling stock market will drive down the value of 401(k) and IRA accounts invested in equities.
- While pension plans are run by professionals whose fees are paid by the corporate sponsor, consumers with IRAs or 401(k)s must figure out their own investment strategies and pay fees.
- Despite the tax penalties, many consumers raid their 401(k)s to pay pre-retirement expenses, something they can’t do with a pension.
Unless you buy an annuity — which comes with its own plusses and minuses — it’s hard to know what to do when you reach retirement age and have to parcel out your savings to last a lifetime.
- “A lot of people don’t know what to do with a lump sum,” Chantel Sheaks, executive director of retirement policy at the U.S. Chamber of Commerce, tells Axios.
Silver lining: For younger people, who are less likely to stay at the same job for decades, a 401(k) or IRA can offer more flexibility.
The bottom line: Despite these issues, people with either a defined benefit or a defined contribution plan from their employer should consider themselves lucky.
- A quarter of non-retired Americans had no retirement savings or pension in 2018, according to the Federal Reserve, while “six in 10 non-retirees who hold self-directed retirement savings accounts, such as a 401(k) or IRA, have little or no comfort in managing their investments.”