401k plans sometimes get a bad rap as being inadequate for providing retirement income. After all, who wouldn’t want a guaranteed income in retirement that probably accrued with no employee contribution. I have such a pension – I worked for one company for nearly fifty years.
To obtain the most value from a pension plan requires long service. For most workers, and especially these days, that is no longer the case. Most people change employers every four years or so. When that occurs the traditional pension provides no value.
The following data is thanks to regular reader, BenefitJack who took the time to gather it.
DB = defined benefit plan (traditional pension). DC = defined contribution plan, mostly 401k plans
Here’s the form 5500 data (1975 – 2019) from the Department of Labor:
# of Plans
1975 103k DB 207k DC
1983 172k DB (max)
2019 686k DC
# of Participants
1975 33MM DB 12MM DC
2008 42MM DB (max)
2019 109MM DC
# Active Participants
1975 27MM DB 11MM DC
1980 30MM DB (max)
2019 85MM DC
1975 $185B DB $74B DC
2019 $3,274B DB $7,433B DC
At its maximum, there were only 30 million active DB participants. Most likely never vested (did not earn a right to a pension) as median tenure was consistently < 5 years for past five decades. Until 1989 (TRA 86 compliance), many DB plans used 10 year cliff vesting. See: https://www.psca.org/news/blog/make-retirement-plans-great-again
This information was posted on Linkedin in response to a post that lauded the value of defined benefit pension plans. I too appreciate DB plans – in fact, of my last ten employers, six were firms that had a DB plan where I was accruing pension benefits. It was one reason (albeit a very, very small reason) why I accepted employment offers from those employers *that is, I might have accepted their employment offer even if they did not have a DB pension plan). I vested in the last two plans I participated in (both had 3 year 100% vesting by the time I left their employ). I did not vest in the prior four employer-sponsored DB plans in which I participated.
My point wasn’t so much to denigrate DB pension plans but to place the 401k in the proper context:
– First, today’s 401k looks nothing like the first use of 401k features – features that initially took effect when they were added as a choice to existing retirement savings plans (thrift/savings or profit sharing) back in 1981-1982,
– Second, whatever you think about 401k plans, we’ve seen a blowout of plan adoptions, participation, and asset accumulation over the past 40 years – meaning that the 401k has benefited a dramatically greater percentage of workers,
– Third, while I didn’t make this point in the article, it is important to remember that when Congress added Section 401k to the code in the 1978 tax legislation, the intent was to REDUCE plan adoptions, participation, deferrals, asset accumulations – not INCREASE them. In fact, the Joint Tax Committee scored section 401k as having no impact on the federal budget – because Congress intended to DEPRESS/CURTAIL deferrals that were already occurring in profit sharing plans, and
– Fourth, the decline in adoption and continuation of accruals in DB pension plans started well before the first 401k features were added to an existing DC plan.
My last two employers (Fortune 100 companies) have had both a 401k and defined contribution pension plans (contributing 5 % of your salary). The current 401k match is 50 % up to 8 %. While I wish the 401k match was 100 % – it’s fine given the pension (which vests in 3 years).