In the retirement industry, no change has been more significant than the shift from a defined benefit (DB) pension system to a defined contribution (DC) system. This major change brings with it unintended consequences.
According to the Pension Benefit Guaranty Corporation there were 112,000 DB pension plans in force in 1985. By 2011 that number had shrunk to 25,500 — a decline of 77 percent. The Fortune 100 companies saw a similar decline. In 1998, 90 percent of the companies had a DB plan and by 2012, only 3 in 10 still had pensions. (See chart)
Among pre-retiree baby boomers (55-70 years old and not yet retired) 35 percent have DB plan coverage at current or previous employers according to the 2010 Survey of Consumer Finances. Following the boomers, only 16 percent of Gen X and Gen Y who work in private sector jobs have access to a DB plan.
While employees will need to depend much more on their DC plans, most aren’t saving enough to provide an adequate income in retirement. Their solution is to work longer. Health issues and job loss are factors that employees cannot control and often do not consider in their desire to postpone their retirement. While we have yet to see how this all plays out for employees, there are unintended consequences for employers, too.
When traditional DB plans were set up, employees were encouraged to not work beyond their normal retirement age. What happens when a company has a large number of older employees who have to work indefinitely? It may mean higher benefit costs and potential productivity concerns.
Companies moved away from DB plans for obvious reasons. The shift lowers retirement costs at a time when other benefit costs (like health care) are increasing. We don’t yet know the consequences of the shift. At some point will we end up with a new model that combines the best elements of a DB plan and a DC plan?
Only time will tell.