There’s a certain type of employer-sponsored retirement plan that’s the stuff of legends. They’re called traditional defined benefit pension plans, meaning employees get a fixed amount of money upon retirement, usually shouldered by the company.
While they’ve since been replaced in 401(k) plans in almost every company, there’s an argument to be made that today’s tight labor market could offer companies that bring back pensions an edge in attracting talent. Marketplace senior economics contributor Chris Farrell recently spoke with Marketplace’s David Brancaccio about the possibility.
“The most compelling argument is this: how can employers attract and retain talent in a tight labor market,” Farrell said. “Well, one way is offering employees something they highly value: a guaranteed monthly income in retirement.”
Below is an edited transcript of their conversation.
David Brancaccio: Traditional pension plans, what was that? You work a certain number of years and you get a certain amount of money every month once you retire. That was the old school.
Chris Farrell: That’s the old school. So for many listeners that was, you know, their parents, maybe their grandparents, you know, at retirement, as you say they get this predictable monthly income. And it’s called a defined benefit pension plan, and the employer bears the investment risk, and they commit to this fixed payout of money. But over the past five decades, companies decided, look, we want to shed this liability. We want to reduce our administrative burdens, and they moved away from these traditional pensions.
Brancaccio: Yeah, I know those state and local governments still rely on the traditional method, not corporate America, they’ve shifted risk on to retirees in this way. There are 401(k) plans, but as we know, those can go up and down.
Farrell: Oh, yes. And here with the 401(k). You know, employees decide how much money to invest and where to invest that they bear all the investment risk. But here’s the really big difference, David, employees don’t get a predictable and guaranteed monthly income at retirement. Instead, they must try to figure out if they’ve accumulated enough savings to retire comfortably, and yet retirees, future retirees, what they’ve always wanted a stable, reliable, guaranteed monthly income for life.
Brancaccio: All right. Well, I’ve know that there’s recent legislation that made it easier for companies to offer annuities to people who are doing the 401(k) type of plan and annuities are an insurance product and guarantees monthly income so you can get it that way.
Farrell: Well, you know, private annuities are not popular. Private annuities are often costly, but here’s the thing. Annuities just adds another layer of complexity to an already too convoluted, too complicated 401(k) product.
Brancaccio: OK, but why would private sector employers want to change their minds and go to the defined benefit old school plan?
Farrell: The most compelling argument is this: how can employers attract and retain talent in a tight labor market? Well, one way is offering employees something they highly value: a guaranteed monthly income in retirement. Now the focus at the moment seems to be on convincing large employers to reopen or unfreeze their pensions that have been closed to new employees. But perhaps labor shortages will even bring new life to an old idea, that 401(k) supplement rather than replace traditional company pensions.
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