Last week, IBM added its name to the list of American corporations abandoning traditional defined benefit pension plans in favor of 401(k) plans. As this story reveals, however, IBM is not alone.
IBM isn’t alone: Large employers are increasingly freezing their traditional pension plans and automating 401(k) features to nudge workers to save in these do-it-yourself accounts, new research shows.
In 2005, 67% of large employers offered a traditional pension – a payout in retirement based on years of service and final pay – down from 91% two decades earlier, Hewitt Associates says.
IBM last week became the latest big U.S. employer to say it would freeze its traditional pension plan. At the same time, IBM said it would sweeten its 401(k) plan for 125,000 U.S. workers.
IBM’s sweeteners include an automatic company contribution of 1% to 4% of pay – even if workers don’t save anything themselves. And for those who do save in a 401(k), IBM will also match 100%, up from 50%, of the employee’s contribution up to 6% of pay.
As Brad Warbianny says, the traditional pension system is outmoded and no longer economically viable, something I can attest to from personal experience. My father worked for more than 40 years for a company that offered a self-financed defined benefit plan. When the company went bankrupt, it became clear that the pension plan was seriously under-funded and it ended up being taken over by the Pension Benefit Guaranty Corporation or, in other words, the American taxpayer. My Dad was able to retire and walked away from this debacle in good shape, but in the end the company declared bankruptcy, was bought out by a group of investors who tried to save it and ended up closing its doors about a year ago. Absent its pension obligations, its possible they would’ve been able to survive.
As Brad points out, the problem with the 401k system is the fact that there is a significant percentage of the population that, foolishly, is choosing not to participate. The consequences of failing to plan for retirement are obvious; you end up becoming depending on government assistance to survive. The fact that people don’t see the long term consequences of their decisions is troubling, which is why some have suggested that participation in 401k plans should be made mandatory.
While I don’t believe that people should be forced to participate in 401k plans if they are eligable for them, I do think that the fact that so many Americans do not plan for their financial future is a significant problem.
Technorati Tag: 401k, Retirement
