May 30, 2009
401(k)s Will Supplant Pensions in Our Lifetimes
How far the 401(k) has come since employers first introduced the savings plan in 1981. And how far it has yet to go. 401(k)s, I predict, will become universal in our lifetimes, supplanting all forms of pension plans.
The first time I heard about 401(k)s, when I entered the workforce in 1982, was from a fellow classmate from the University of Pennsylvania, who was familiar with then-esoteric 401(k) section of the IRS code (then being touted merely as a tax benefit), since she worked as an accountant for Coopers & Lybrand.
Recently, 27 years later, I was discussing pensions and the future of 401(k)s with another fellow classmate from another of my college alma maters, Skidmore College. An attorney with the Federal Emergency Management Agency, she offered the point of view of a lifelong government employee, who chose the public sector over the far more lucrative private sector partially because of the lifelong pension benefits the government provides, starting at a relatively young age, at that.
Noting that federal, state and local governments are offering pension/457 plan hybrids as a way of weaning government workers off of pensions, and that she herself has a self-directed Thrift Savings Plan, I maintained the goal of the government is to eventually make guaranteed pensions extinct. No way, she said, taking umbrage that it was even remotely possible for the government to so completely change course.
Shifting the responsibility for one's retirement onto workers, be they private sector, non-profit, union or government employees, is, for better or worse, the future. I would even go so far to say that the current trend of smaller employers ceasing healthcare coverage, blaming it on the recession, is also the wave of the future. Health savings accounts will someday take their place.
As 401(k)s march toward becoming universal, the mutual fund industry is in a fighting position to lobby for many of the improvements that were discussed at the ICI's recent General Membership Meeting. As more workers are left holding the bag, we have a responsibility for the outcome of Americans' retirement outlook to do so. Automatic enrollment and investment increases, target-date funds and embedded advice from third-parties are excellent first steps.
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