Data from the Bureau of Labor Statistics indicate that just 15% of private industry employees have access to a pension, also known as a defined benefit plan. Employers began moving away from these plans in the late 1970s when the 1978 Revenue Act began allowing employees greater control over their retirement savings by using pre-tax dollars for 401(k) contributions. Some employers saw this as a potential opportunity to reduce risk and long-term financial obligations, ultimately leading to a better bottom line. However, many employers are reconsidering that decision amid data showing how cost-effective pension plans are compared to 401(k) plans. If you’re in the market for a new job, this could be good news for you and the company you’ll work for.
The Case of IBM’s Big Decision and the Revival of Pension Plans
Recently, multinational tech giant IBM has decided to halt 401(k) matching and bring back its defined benefit plan for full-time employees. Under the “new” pension plan, the company will set aside 5% of an employee’s salary for the pension fund. This is the money the company would have used to match employees’ 401(k) contributions.
Under this plan, IBM will guarantee a 6% return rate within the first three years. After that milestone is met, the company will ensure a return roughly equal to the 10-year treasury rate.
This move is profitable for IBM and other companies in multiple ways. Not only do companies save money outright by not having to match 401(k) contributions, but they also reap the benefits of other cost-saving methods. You’ll benefit from a more peaceful road to retirement as an employee. Discover why choosing a pension over a 401(k) could be best for you and your employer.
Why Pensions Are Attractive to Employees
As an employee, you likely want to save for retirement without hassle, risk, or worry about the future. Unfortunately, 401(k) plans can’t always help you achieve these goals, making pensions the more desirable option. Here’s why many employees prefer pensions over other retirement planning methods.
Stable Income
Pensions provide a fixed monthly payment based on concrete factors, such as your years of service or salary size in the last few years before retirement. You can count on receiving that income if you work for the same organization in a pension-eligible role for the specified period.
Furthermore, many pension plans allow for cost of living adjustments (COLAs) to help you keep up with inflation. Plan administrators may also use benefit indexing, a practice that periodically increases your pension payment if you separate from the company before retirement but delays collecting your pension.
Conversely, the value of your 401(k) plan lies solely in your ability to save enough toward your retirement. Your plan’s value is also dependent on market volatility. If your life circumstances prevent you from making 401(k) contributions during your working years, you could end up sacrificing financially during retirement.
Lifetime Income
Employees who participated in a defined benefit plan will get a set monthly payout for the rest of their lives. This consistency can bring you peace of mind since you’ll be less likely to run out of money in retirement.
401(k) contributions don’t come with this type of guarantee. Most people won’t outlive their pensions, but a 401(k) can run out, depending on how much you saved and how well you managed investment risks.
While there are guaranteed options, such as converting your 401(k) into an annuity, these options can be costly. Therefore, many employers don’t offer these alternatives. Additionally, these methods are complex, making them a poor fit for your retirement strategy.
Risk Management
Recessions and market fluctuations can also cause your 401(k) and other investments to lose money. As a result, your income may be more unstable in your later years if you rely solely on a 401(k) for retirement.
To rely on a 401(k) for retirement, you must diversify and monitor your investments closely. You may need to periodically rebalance your portfolio to achieve stability or purchase a guaranteed product for more predictability.
Because managing 401(k) contributions can be complicated, you may need to seek expert opinions on your financial decisions. Unfortunately, the wrong move can negatively impact your financial future.
With a pension, you don’t need to employ any risk management strategies or worry about fluctuations in the ever-changing market. Pensions often invest in stocks and bonds to grow the pool of money to which employees contribute.
However, retired employees’ pension-based income is not dependent on how those investments perform. The promises of a defined benefit pension are not reliant upon short-term market volatility.
You will receive the income your employer promised you for life as long as you have met the conditions for retirement, such as a specified number of service years in an eligible role. Even if the company goes bankrupt, the Pension Benefit Guaranty Corporation, a U.S. government entity that protects pension benefits for private sector employees, will likely guarantee you still receive an income.
Why Pension Offerings Are Attractive for Employers
Pensions offer substantial benefits for employers as well. Learn how an employer can use this retirement safe haven to save money while boosting its brand and bringing in new talent.
Talent Attraction and Retention
Today’s job seekers desire to work for employers offering financial security. Like many who came before them, Gen Z college graduates have picked up a lot of debt and are looking for ways to create stability amid a shaky economy. Many expect to support older family members financially, which can reduce 401(k) contributions and make Gen Z employees less tolerant of financial risk.
It may be surprising to know that, even when fresh out of college, Gen Z graduates value retirement benefits that will help them make financial moves for which their future selves will be thankful. Among Gen Z graduates, 15% think about retirement planning a lot, and 27% say they think about it a “fair amount.”
Additionally, 65% of Gen Z graduates say they heavily consider these benefits when choosing an employer. For these reasons, employers offering a rock-solid retirement benefit like a pension plan can be highly attractive to top-notch talent.
As David Burns, CEO of Vitech, which provides the pension administration platform for many of the country’s largest pension programs, says, “Companies that offer pensions signal a long-term commitment to their workforce, making them appealing to candidates seeking stability and alleviating the financial decisions required with a 401(k) plan. Additionally, pension plans can differentiate a company in competitive talent markets, particularly when recruiting experienced or high-demand professionals who value long-term financial security.”
Cost-Effective Administration
Many employers left their pension plans behind because of the assumption that transferring the financial risk to employees would result in huge corporate savings on retirement plans. However, this couldn’t be further from the truth. Recent research from The National Institute on Retirement Security suggests that defined benefit pension plans offer a 49% cost advantage over 401(k)-style accounts.
The report concludes that 401(k) accounts have higher fees but lower returns, offer less balanced portfolios, and don’t provide a longevity pooling benefit. David Burns states, “Unlike 401(k) plans, which are often more volatile and subject to individual investment risks, pension plans provide a defined benefit, allowing companies to manage costs more effectively over time. Pooling resources in a pension fund can lead to economies of scale, reducing administrative and investment management fees.”
Pension plans allow employers to take advantage of tax benefits as well. For example, an employer’s 401(k) contributions to the pension fund may be income-tax deductible. Additionally, any capital gains from investments can often grow tax-free. These benefits allow for further cost savings and will enable a business to use its budget more effectively.
A Blast From the Past Could Signal a Better Financial Future
According to the Economic Policy Institute, participation in retirement plans has declined in recent years. Research shows that voluntary plans like 401(k) accounts are particularly vulnerable to economic instability. When times are tough, you may be less inclined to save for retirement and more likely to attend to your immediate needs.
Additionally, you may hesitate to make the wrong decisions about saving, investing, and withdrawing your money. Getting the correct answers is essential, as these decisions will impact your ability to maintain your lifestyle (and possibly even pay your bills) in your later years.
Choosing a job that offers a pension instead of a 401(k) plan can eliminate those questions and worries, giving you more certainty about your future with less hassle now and a guaranteed income later. Best of all, your employer can boost their bottom line by providing you with these benefits.
Though many believe that pensions are outdated, the benefits they bring to organizations and their employees could make them the wave of the future.
