In a report titled “Supporting Retirement for American Families,” the Council of Economic Advisors to the President noted the trend that traditional defined benefit (DB) pension plans - the type of plans that provide guaranteed lifetime income – have become less prevalent. The lifetime employer provided pensions are becoming a thing of the past.
Researchers have been trying to discover how American workers and employers offering retirement plans weathered the economy from 2007 through 2012. Although most people would expect nothing but bad news, there is also a surprising amount of good news to report. Researchers are hopeful that their findings will shed light on situations that can be further improved to help workers adequately prepare themselves for retirement. They also believe this can be achieved without massive legislation or reform measures.
While employers have had to cut raises or even staff members during the Great Recession, their retirement plans have stayed intact overall. However, the number of companies offering traditional pension plans dropped by about three percent between 2007 and 2012. Gone are the traditional lifetime pension plans of the past. Many employers have stopped funding defined benefits plans and are replacing defined contribution plans with 401(k) or similar plans.
For 401(k) and similar plans, the number of employers offering such benefits increased by about 10 percent. This was especially true with smaller companies. The number of employers matching contributions also dropped by about 10 percent during this time. While this number may seem dismal, it appears many of those same employers have reinstated their policies for contribution matching.
During the past five years, employers offering sponsored plans also added new features. Many have added automatic features or a qualified default investment alternative. Plans offering Roth features increased by about 23 percent during those years.
Many people wonder why employers continue their sponsored plans instead of giving raises or keeping more staff. This is because employers consider these plans to be useful tools for attracting and keeping good talent. When there are more workers looking for jobs, employers tend to have a much wider variety of talent to consider.
Researchers found that more than 80 percent of employers felt these plans were vital for keeping their best workers on board. Employees are also taking retirement issues more seriously.
Researchers found that workers are trying harder to save money for retirement. In a recent study, they found that the number of employees who felt confident about retiring comfortably only dropped by about eight percent during those five years.
With workers who were offered 401(k) or similar plans, researchers saw that rates remained steady throughout that time period. While this is good news, there is also a dimmer side to the statistics.
Researchers found that a considerable amount of workers had to withdraw some of their savings to compensate for economic hardships. Despite this negative statistic, overall numbers show that retirement savings were higher in 2012 than in 2007 for the average household.
Although this is a step in the right direction, many consumers are not where they want to be or should be for a comfortable future. To compensate for this, many are planning to work longer. Researchers found that more than 55 percent of workers plan on working past age 65. More than 40 percent plan to work past age 70 or indefinitely. However, researchers point out that Americans need to have a way to regain their confidence when it comes to retirement planning.
One way to regain that is for employees to have the opportunity to allocate a portion of their 401(k) savings to provide their personal Lifetime Income Guarantee retirement plan. Earlier this year, The Council of Economic Advisors, the U.S. Treasury and Labor Departments released statements that highlight the importance of workers using financial products – annuities – that provide guaranteed lifetime income.
Today’s standard retirement system, which includes employees contributing to a large funding pool, is under a great deal of criticism. However, most alternate systems that have been proposed before would probably have concluded with similar problems as the current system.
Experts understand that employers cannot control the financial market’s performance. The best way for employers to contribute to a brighter future for their employees is to work together to increase access to investment fund choices, retirement plans, distributing options and education. The following are simple but valuable tips for employers:
- Encourage plan participation by adding automatic enrollment or automatic escalation.
- Regularly offer educational resources from plan providers.
- Offer matching contributions to 401(k) plans, and encourage greater salary deferrals.
- Offer annuities with lifetime income guarantees and the protection of a personal pension by allowing a portion of the employee’s personal 401(k).
Policymakers can help by increasing tax credits for employers, which would expand qualified plan coverage. They may also provide incentives to boost participation.
Extending 401(k) repayment terms is a helpful step, and expanding the saver’s credit through a higher income eligibility will also be helpful. To learn more about plans and costs, give us a call at 407-644-6646.
Bob Adams is president of A SafeHarbor, a firm specializing in assisting families in having a calm retirement when faced with stormy financial wa- ters. Visit aSafeHarbor.com or call 407-644-6646 for more information.