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Filling the Pension Void with 401(k)s

Practice Management

Traditional pension plans are still present, but shrinking — particularly in the private sector. What will fill that void? A recent column argues that the 401(k) can fill the void the decline of the DB plan creates, and then some.

In “401(k)s Can Fill the Pension Gap,” American Enterprise Institute Resident Scholar Andrew Biggs, writing for The Hill, argues that there is good news for retirement security. “What will happen to retirement security in the United States as traditional pensions fade away and 401(k)s take their place?” he asks, answering,  “actually, not much.”

A 2017 Census Bureau study showed that more than half — 56% — of current retiree households receive their benefits from a traditional pension plan, Biggs writes. But that is largely due to public-sector plans, he suggests, noting that participation in private-sector DB plans in the last 46 years has fallen by two-thirds to 13% of the workforce.
Despite those declines, Biggs notes that there is good news. “By any historical standard, retirees are doing well,” he writes, and by several measures:

  • retirees’ incomes have risen faster than people in the workforce;
  • the number of retirees with private retirement benefits has nearly doubled;
  • the percentage of seniors living in poverty has fallen by almost a third;
  • 4% of seniors in a Federal Reserve survey say it is difficult to get by, while among the working age population twice that percentage does; and
  • while some public plans have “funding woes” but will continue to pay benefits “Into the forseeable future.”

And Biggs points out that there is still more good news: Automatic enrollment, which increases participation; target date funds, which shift savings to more stable investments as participants age; and lower fees for low-cost index funds.

Biggs adds that the evidence suggests that 401(k)s need to replace only approximately one-third of the benefits that traditional pensions are paying now. He observes that over the past 50 years, private-sector pensions held investments worth roughly 15%-17% of gross domestic product, and in 2018, IRA balances equaled 47% of GDP. Also last year, says Biggs, private-sector 401(k) balances were worth 29% of GDP. “Moreover,” he writes, “the amount of 401(k) savings show no signs of having peaked.” And therein lies more good news, Biggs suggests: “Therefore, the pension gap for 401(k)s to fill is smaller than commonly believed, while 401(k) assets are also larger than commonly believed.” He offers two reasons for the health of 401(k) balances:

  1. More Americans have 401(k)s than ever had traditional pensions, which employers consider to be costly and burdensome from a regulatory standpoint.
  2. Workers and employers contribute to 401(k)s, while only employers contributed to traditional pensions.

“There is simply more money going into 401(k) plans than traditional pensions ever collected, so 401(k)s can do the job,” says Biggs. Not only that, he notes, private-sector pensions “were always small players” compared to those in the public sector, which contributes to his contention that “401(k) savings can easily replace private pension benefits as those plans fade away.”