Once upon a time, big US companies provided their longtime employees with clearly defined pension benefits that guaranteed them enough to live on for the rest of their lives. That fairy tale ending disappeared for many Americans in the 1980s, when most new employees started to be shunted into a new retirement option. Known as defined contribution plans, or 401k schemes, they put the onus on employees rather than leaving companies on the hook for future payments. Workers must set aside money to get an employer match and then manage their own funds through volatile markets.
Thirty-plus years on, as those workers approach retirement, the results are not looking pretty. The typical Gen X household has just $40,000 saved for retirement, and 40 per cent of their 401k plan balances are zero. Even those who have been able to save more got a stark reminder of the risks involved in 2022, when falling equity and bond markets slashed the average retirement plan balance by 20 per cent.
Pension experts agree that in general, DB plans produce better outcomes for workers because the funds are professionally managed and can balance long-lived workers with early deaths, while individual 401k participants have to worry about outliving their funds.