Credit: Shutterstock photoSpecial Report:Retirement Planning 2015
I s the good old-fashioned pension dying? Once common across many American industries, traditional pensions no longer rule the employee benefit landscape. But given the popularity of job-hopping in many 21st century careers, the death knell of pensions may not matter as much.
While pensions can vary, the typical plan provides a fixed monthly benefit for the rest of a retiree's life, based on a formula that rewards years of service at the same employer. Known as defined-benefit plans , they define the amount of potential payouts based on variables that you plug into the formula. To get full benefits, employees typically have to stay on the job for many years. If they leave earlier, they give up most or all of those benefits. That contrasts with defined-contribution accounts like 401(k)s, which are more portable.
As workers change employers with more frequency, pensions lose their allure. Job-hoppers increase their retirement savings by participating in defined-contribution plans like 401(k)s that are designed for portability.
"The point where defined-benefit plans begin to provide employees with a better deal than defined-contribution plans is after 15 or 20 years with the same employer," said Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington, D.C. "That's why a majority of workers in surveys, especially younger workers, say their preference is defined-contribution plans. Those with 30 years at the same employer prefer defined-benefit plans."
Millennials -- individuals born between the early 1980s and early 2000s -- have a reputation for zigzag career paths at multiple employers. But they're not the only ones who like to switch jobs.
From 1951 to 2014, over half of the American workforce surveyed had been with their current employer for less than five years, Salisbury says. Even among employees age 55 to 64, the median job tenure is roughly 10 years. That means old-style pensions do not provide substantial retirement income for a typical worker.
Longer Lives, Higher Costs
A handful of industries in the private sector continue to offer old-fashioned pensions to retain employees. Such benefits are particularly important in businesses that depend on technicians with highly specialized skills.
"People say the era of cradle-to-grave employment is over, but in the utility, pharmaceutical and oil and gas industries, it's very expensive to replace certain types of employees," said Byron Beebe, U.S. retirement market leader at Aon Hewitt in Cleveland. "Because they value low turnover, you still see pensions" in these industries.
But red flags abound. As aging retirees live longer, the cost soars for pension sponsors.
In a recent update of its mortality projections, the Society of Actuaries estimated that today's average 65-year-old male will live 86.6 years and the average 65-year-old female will live 88.8 years. That's roughly two years longer than the group's prior estimates from 2000.
Dozens of corporations such asGeneral Motors ( GM ) andVerizon Communications ( VZ ) have responded to mounting pension costs by taking big charges to their earnings. One sticking point in February's labor dispute at West Coast ports involved pension benefits.
To address these financial strains, large employers are converting their defined-benefit plans into hybrids that combine a modest traditional pension with a defined-contribution feature. Racing to cap their pension liabilities, many states and other public employers are following suit.
Rising pension costs, coupled with the shift to employee contributions to retirement accounts, signal that the traditional pension won't regain its stature from 1980, the high point for private-sector participation in defined-benefit plans.
Plan Early
Two other trends further decrease the likelihood of a comeback in old-style pensions, Salisbury says. First, the decline in union membership could reduce defined-benefit plans because unions often negotiate such plans in both the private and public sectors. And if the continued implementation of the Affordable Care Act enables more Americans to switch jobs without fear of losing their health insurance, defined-benefit pensions would lose steam.
Despite all the trouble signs, some workers seeking job security may still find pensions attractive over the long haul. Just make sure to find the right employer.
"If you're going to target an industry that has a defined-benefit plan, the other half of the equation is your objective to work there for decades," Salisbury said. "If you get bored easily and change jobs every four or five years, you should target the best, most generous defined-contribution plan you can find."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
