Conventional wisdom suggests that the massive switch from pensions to do-it-yourself workplace retirement plans over recent decades has resulted in people accumulating less for retirement and being less prepared for this big-ticket milestone.
What would your reaction be if this turned out to be wrong?
Researchers at Boston College surprised themselves when they began looking at the latest statistics from the U.S. Commerce Department’s National Income and Product Accounts, which represent one of the main sources of data on the country’s general economic activity. This data shows annual contributions to both pensions (defined benefit plans) and 401(k) accounts (defined contribution plans), but because the government now compiles it in a different way, the statistics are more helpful and ultimately eye opening.
Shift Away from Pensions
Before sharing the results, here is some background: In the early 1980s, most workplaces in the private sector were covered by pension plans, but by 2013 the share of workers covered by pensions had dropped to less than 20 percent.
It’s widely believed that the shift away from employers providing for their workers’ retirement and the move to make employees take on this burden themselves meant that Americans would be far less prepared for retirement.
When the analysts looked at what was happening with pensions versus 401(k) plans from 1984 to 2012, they noticed that pension accruals declined sharply while 401(k) plan assets rose commensurately. On balance, however, the decline in pension plan accruals was not fully offset by the money that workers were putting into 401(k) plans. According to the report, this led to a “slight overall decline in retirement saving.”
So far, the results sound like they are tracking conventional wisdom. But strictly looking at contributions to pension plans and 401(k) accounts doesn’t tell the entire story.
A Challenge to Conventional Wisdom
The analysts discovered that when returns on the retirement assets were examined in addition to contributions, the annual change in pension wealth seemed to be relatively steady over time. In other words, the move to 401(k) plans has not led to lower total retirement savings.
The authors suggested these potential reasons for this finding:
Workers in 401(k) plans have taken more risks than conservative pension plan administrators and that investment strategy has generated higher returns which has fattened voluntary retirement accounts. What’s more, participants in 401(k) plans have benefited from the prolonged bull market in the 1990s and the strong market after the 2008-2009 financial crisis.
“Our reading of the data, after our adjustments, is that the accumulation of retirement assets has not declined as a result of the shift from defined benefit to defined contribution plans. We are going to have to change our story!”
What has changed, however, is that investment risks have been shifted to workers, who must assemble mutual funds in their own portfolio and suffer the consequences if they choose poorly.
And, of course, national data only provide an overview of what’s happening. Since individuals must manage their own portfolios, there will definitely be retirement winners and losers.