NEW YORK (MainStreet)
— The American Retirement Crisis won't bring back pension plans, but
the "war for talent" just might. An overwhelming majority (85%) of
Americans are worried about their opportunity to retire. Virtually the
same number (82%) believe that workers withpensions are more likely to enjoy a secure retirement, and 84% say that all Americans should have access to a pension, according to the National Institute on Retirement Security (NIRS).
It seems what we have in place now is not working – so, is it time to bring back old-fashioned pensions?
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Pension plans will return only if the job market demands it.
"Corporate America has found that pensions are no longer necessary to attract employees," says Jim Heafner, a financial advisor in Charlotte, N.C. "It's as if they all got together and agreed collectively to terminate pensions for new hires so they could all save a bunch of money."
But because pension plans are "incredibly" expensive, according to Heafner, employers will only revive them if the job market demands it.
"In a time when pensions are not necessary to entice good employees, I see no logic for pensions to return to corporate America. The only reason that Corporate America will ever turn back to pensions is if the competitive landscape requires it. In the future, when the economy moves at a faster pace and competition for talent heats up, it is possible that we will see the rebirth of pension plans, once again making them commonplace. Given the state of our economy and the fiscal challenges facing America, that may be some years off," Heafner says.
The "good old days" of pensions are gone.
But Jeffery D. Cortright, a financial advisor in Jenison, Mich., believes the days of corporate pensions are over – never to return.
"You need look no further than state and local government pension fund issues to understand the 'good old days' are gone for pooled pension programs," says Cortright. "Longevity for beneficiaries, litigation over mismanagement, investment fraud and beneficiary financial fraud are just a few reasons there will not be a resurgence in the pension programs of yesteryears."
"As is often said, 'no one will look after your money as closely as you do,'" Cortright says. "If we rely on an employer to manage the funds for all employees, we run the risk of one bad decision impacting an entire workplace. If the employee has the responsibility, a bad decision impacts just one worker. To build the proper foundation for this responsibility, however, we need to make financial education a larger priority through schools, employers and retirement saving programs."
Pension plans are not a "wealth building" tool.
And at least one advisor is not sorry to see the departure of private pensions. While such plans have provided retirement income for employees in the past, pensions are not really "wealth building" tools for workers, according to Ilene Davis, an investment advisor in Cocoa Beach, Fla.
"It may represent a future source of income, but if someone needed a lump sum to fix a roof or buy a car, they could get it from a 401(k) plan but not a pension, and other than to a spouse, none of the benefits typically will be passed on to other beneficiaries," Davis says. "Plus the continuation of that pension is dependent on the solvency of the company and/or the Pension Benefit Guaranty Corporation, which ultimately is likely to depend on the kindness of Congress to use tax dollars to keep it honoring promises.
Rising interest rates could see pension plans "roar back."
But still, there are those who hold out hope for a return to the days of corporate-sponsored retirement incomes. Oliver G. McGee III is a former U.S. Deputy Assistant Secretary of Transportation for Technology Policy in the Clinton administration and a professor of mechanical engineering at Howard University. He believes pensions are set for a comeback.
"When interests rates turn around again, so will defined benefit pensions start to roar back," McGee told MainStreet. "And just as welfare policies have roared back, so will pension policies roar back again, too."
"Because it's good business strategy to anticipate such regulatory and liquidity risks," he said. "This is especially the case in businesses addressing regulatory risks by encouraging the need for job creation to reduce welfare rolls. And this is especially the case in businesses watching their liquidity risks by enhancing internal labor markets of businesses through better recruitment and retention policies."
McGee thinks rising interest rates will spur rising interest in pension plans.
"Soon businesses will begin to re-open frozen defined benefit pension plans, as interest rates change, that will in turn benefit such plans," he said. "As businesses run the numbers, they will begin to see that any expansion of a 401(k) may possibly be more expensive than offering a defined benefit plan, especially when businesses take into account the drain of cash reserves associated with employee turnover, which defined benefit plans generally reduce.
Pension plans = accountability
Todd Uzzell, an insurance agent in Mesa, Ariz., thinks there are at least a couple more good reasons to resurrect pension plans.
"The less power we allow our government to have, the less control that they have over us," Uzzell says. "When we changed to the '401k system,' accountability went out the window."
Uzzell says pension plans have a chain of accountability that is lost with 401(k) plans.
"With pensions, there were some tacit and written guarantees barring a company from going belly up," he said. "These guarantees required a certain level of accountability. The fund managers all wanted to manage the pensions thus making them accountable to the pension boards; pension boards were accountable to their workers, and the workers saw the value in staying with a company for an extended period of time."
If the pension fund didn't perform, then the manager stood to lose the account, and the pension board was held responsible by the employees. He says this is a system that promotes performance.
"Under the '401k system' it is backwards, the employees -- who generally know very little about the financial market -- choose their own funds and manage their own retirement future," Uzzell continues. "If they choose poorly and do not have an adequate retirement nest egg, they have no one to blame but themselves.
Personal responsibility is all good and well, except that the system doesn't require banks to perform for customers. A bad year doesn't mean any accountability.
The 401(k) idea was brought about by the banks and shrouded in the guise of letting the people who have no idea how the markets work control their destiny," Uzzell said. "Pension plans equal accountability."
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