Last Updated Jul 1, 2009 12:21 PM EDT
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.
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.
- 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.