retirement

Pensions decline as 401(k) plans multiply

Retirement » Basics » Pensions Decline As 401(k) Plans Multiply

Once upon a time, individuals worked for just one or two employers during their lifetimes.

When they quit, long-term employees were rewarded with send-off dinners, gifts -- like the traditional gold watch -- and most valuable of all, a pension plan to help them settle into carefree retirements.

Today, many of us hopscotch from job to job. As for those traditional pension plans that employers funded and invested on behalf of their workers? They're becoming as rare as a wind-up pocket watch.

To be sure, the clock's been running out for pension plans over the past few decades, with fewer employers offering them to workers. In 1979, 28 percent of all workers were enrolled in defined benefit plans. By 2012, it had dropped to 3 percent, according to the Employee Benefit Research Institute, or EBRI.

Effect of new law

But the demise of the pension may have happened even faster than expected, thanks to the Pension Protection Act.

Passed in 2006, the law was designed to safeguard pensions from budget shortfalls by requiring companies to guarantee that plans were nearly or completely funded. Instead, new rules triggered a "significant acceleration in the pace of plan freezes," according to findings released by EBRI and Mercer Human Resources Consulting.

With risks of the investing falling on the plan sponsor, many employers in a survey by Mercer and EBRI began closing off traditional pension plans and increasing contributions to traditional 401(k) plans, where the investment risk falls on the employee.

The fallout

But the slow demise of traditional pension plans doesn't mean employees are completely adrift. That's because defined contribution plans, a fancy term for retirement plans such as the 401(k), are replacing old-style pensions. In fact, 98 percent of employers offer a 401(k), according to a 2013 survey by consulting firm Aon Hewitt.

401(k) plans step in

Most employees have embraced 401(k) plans. Millions of workers contribute to a 401(k), and assets in plans in the second half of 2013 hovered around $4.5 trillion, according to the American Benefits Council, which used numbers from the U.S. Department of Labor.

Company contributions are typically limited to a formula that matches a percentage of the employee contribution. According to a 2013 survey of major U.S. employers by Plan Sponsor Council of America, 401(k) participants are contributing an average 6.8 percent of their paycheck. Employer contribution averages 4.5 percent of pay, up from 3.7 in 2010.

Updated: July 24, 2014

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