Will Traditional Pensions Make A Comeback?

(MoneyWatch)  With workers stressing over their retirement plan balances, more people are calling for a return to some form of traditional employer sponsored pension or lifetime income guarantee. Let me break this to you gently: it's not going to happen. While policy wonks and commentators may debate it, the vast majority of employers have no stomach for it. You need to accept that your retirement is your responsibility, and plan accordingly.

Short History of Success. Contrary to popular opinion, employer based pension plans had a very short history of success. They ran well from about the mid 1940s through about the mid 1970s, and then big cracks started to develop in the system. Basically, many employers over-promised and underfunded these plans. Once they figured out how much it would cost to guarantee a worker's pay for 20 or 30 years in retirement, they began to back away from the benefits. And the trend has continued ever since.

Strange Beginning. In fact, employer pensions took off in large part as a result of wage freezes instituted during World War II. The costs of fringe benefits were exempt from the wage freeze provisions, so employers upped wages by promising to fund worker retirement plans. But the plans distorted the calculation of total wages paid to employees, which of course was their original intent. This distortion came back to haunt employers when times got tight.

• As pension costs rose, employers had to continue to pump more money into the plans, yet the employees had no idea how much it costs. So in the employees' minds, they weren't getting raises, but in the employer's mind, they were. This tension with employee benefits has existed ever since.
• When you think about it, there's no business reason why your employer should agree to fund your retirement any more than they should agree to pay your mortgage.

More Flexibility. Today, employers prefer defined contribution plans, like 401(k) or profit sharing plans, where the employer knows the dollar amount it must contribute each year. And the employee sees the contribution. This gives a truer picture of total wages, and allows for more flexibility on the part of both the employer and employee. If an employer is concerned about your retirement, and many are, they can simply decide to put more money into these defined contribution plans on your behalf.

Multiple Employers. Moreover, in today's globally competitive and rapidly changing markets, traditional pensions aren't generally helpful to many workers. If you're like the average employee, you'll have between five and 10 employers throughout your working career. Pension benefits are skewed to those who work for one employer over a long period of time. Thus, if you have multiple employers over the years, you'll find that you basically didn't accrue many benefits from any employer.

• If you're changing jobs frequently, a better deal is to get a 401(k) match or profit sharing contribution that you own and control right off the bat. That way, you have a clear sense of what you're being paid, and you know what you can take with you when you leave for greener pastures.

Consider the Facts. The industries with the history of the strongest pension benefits were airlines and autos. But unfortunately, the hidden costs of these programs, sometimes referred to as legacy costs, was one of the primary reasons many of these firms failed. And when they failed, some of the promised retirement benefits disappeared as well.

• There's no easy answer to the retirement challenge. Global competition requires workplace flexibly for both employers and employees. Otherwise, you won't be in business or have a job for very long. So as tough as it is, the 401(k), IRA and every other form of individual investment account are your best tools for building long term financial independence.
• The real problem with retirement planning is that people save too little and take too much risk with what they have saved. I'll talk about that in future posts.

Bottom line. Employer based pension plans were a nice deal for those who got them, but they aren't coming back. So make sure you're saving at least 10 to 15 percent of pay each year, and invest it prudently.