Without pensions, is this America's new retirement plan?

A Middle-Class Crunch Obama Didn't Mention

Christopher Flavelle writes editorials on health care, energy and environment for Bloomberg View. He was a senior policy analyst for Bloomberg Government and chief speechwriter for the leader of the Liberal Party of Canada.
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President Barack Obama said today that the middle class is squeezed by stagnant wages, slow job growth and ever-higher college tuition. A new report shows that more and more U.S. workers are getting squeezed in another way: pushed into inadequate retirement plans by the country's largest employers. Worse, their employers acknowledge as much.

A survey last month from Towers Watson, the employee benefit consultant, shows just how rapidly the defined-benefit plan -- the traditional pension that guarantees workers an annual income after they retire -- has moved from the norm at Fortune 500 companies to all but extinct. In 1998, just more than half offered new hires a defined-benefit plan; by 2013, that had fallen to just 7 percent.

That trend continues: According to Towers Watson, at least three of the 34 Fortune 500 companies that offered defined-benefit plans to new hires last year won’t do so this year.

Taking their place are defined-contribution plans, the 401(k)s and other such plans in which employers put money into an investment account in the worker's name. In theory, employees can still save enough for retirement -- if they put enough away, invest it wisely and engage in reasonable planning. But that's not what usually happens -- and according to another Towers Watson survey of large employers, they know it.

In 2012, Towers Watson asked 371 companies about their retirement plans, and how well their employees understood and made smart use of those plans. The answer, in most cases, was that they don't.

A third of companies say their workers expect too much from defined-contribution plans, and 36 percent say those workers aren't making informed decisions about their retirement. And it's hard to expect any different, when most companies don't think their workers even know what they're trying to save, or use the available tools to do so.

QuickTake America's Retirement Gap

Defined-contribution plans rely on the premise that workers are making rational, informed decisions about their retirement. So companies' responses are akin to admitting that the defined-contribution system is failing many of their employees. Which raises the question: If employers don't think their workers can manage the shift to defined-contribution retirement plans, why make that shift?

Here, the companies were remarkably candid. Asked what drove the design of their plan, 63 percent cited cost, while just 46 percent mentioned workers' ability to retire with a reasonable level of benefits. (Only 9 percent said "employee preference.")

Where does all this lead? The worst-case scenario is a return to the idea that old age is a time of deprivation for many people. That option might be unappealing enough that a future Congress decides to beef up Social Security payments. Those could be financed through higher payroll taxes on workers and companies alike -- or Congress could look for a way to pass on the cost to companies alone, on the argument that they're the ones who put us in this situation.

Another option would be for U.S. companies find a way to help their workers make better decisions, probably through some combination of auto-enrollment, auto-escalation (in which default contributions increase with salary) and more generous matches. That may or may not require federal legislation to nudge companies along.

Obama promised today that he "will not allow anyone to dismantle" the foundation of middle-class economic security. That pledge increasingly requires confronting the lightning-fast erosion of adequate retirement plans. The question for companies is, do they want to help? If not, government may need to.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Christopher Flavelle at cflavelle@bloomberg.net

To contact the editor on this story:
Stacey Shick at sshick@bloomberg.net