Last fall's Wall Street meltdown, which erased half the value of some 401(k) retirement plans, has whipped up some of the
fiercest crosswinds the plans have faced in their three decades of existence.
Blowing from one direction, cash-strapped employers are trying to cut back on retirement plan contributions. Others are looking to shut down their pensions and offer only a 401(k)--since they now face staggering shortfalls between their assets and future obligations.
Gusting from the other direction, some employees are yearning for guaranteed retirement income, now that their 401(k)s are decimated and they're not sure they'll have enough to retire. For them, having a pension would be heavenly right now.
Those trends could produce substantial changes in retirement plans, according to local and national experts.
Retirement plan consultants foresee financial firms and employers embracing hybrid plans with features of both 401(k)s and pensions.
Fred Cox, director of compensation and benefits at Evansville-based Vectren Corp., talked with a vendor in late May about adding an annuity option to the gas and electric utility's 401(k) plan. The option would help participants invest in stable choices that guarantee a certain yearly payment upon retirement, like a pension does.
"What you've created is sort of a floor out of what's going to come out of that annuity," Cox said.
Such tweaks are not enough for Monique Morrissey, an economist at the liberal Economic Policy Institute in Washington, D.C. She wants to see individual retirement accounts mandated, controlled and guaranteed by the government--because 401(k)s have failed to provide Americans what they need in retirement.
But no changes are imminent. Employers will have to get through the recession before they have the cash to make significant changes to their retirement plans. And Morrissey acknowledged that potential reform in Congress is taking a back seat while President Obama focuses on recession fallout.
"A lot of employers are not in a position to guarantee a pension decades into the future," Morrissey said. "So we're trying to develop something that would meet the employer needs."
Johnson Memorial Hospital in Franklin determined in late 2007 it would stop funding its pension--also called a defined-benefit plan. The hospital had to set aside more than $1 million some years and cut costs in other areas to fund retirement for its more than 600 employees.
"Our defined-benefit plan was becoming very expensive for the hospital to maintain," said CEO Larry Heydon. "One year we would over-budget for it, another we would under-budget for it. That would just put an overall strain on the hospital."
So the hospital stopped paying into its pension, cashed out its investments, and instead started contributions to its employees' 403(b) plans--a cousin of the 401(k) used by not-for-profits.
In the first quarter of 2009, the hospital paid out $25 million to its retirement beneficiaries in lump sums or by purchasing annuity products for them.
A failed experiment?
Morrissey thinks the 401(k) plans are a failed experiment because even workers who invested smartly saw at least one-third of their monies evaporate in six months.
Since 401(k)-type plans gained popularity in the early 1980s, actual retirement security has worsened, Morrissey contends. That's because, instead of using 401(k)s as a supplement to pensions, many employers replaced pensions entirely with 401(k)s.
In 1975, only 17 percent of American private-sector workers participated in a 401(k)-style plan, compared with 40 percent who had a pension, according to the Employee Benefits Research Institute.
Today, the percentages are almost exactly reversed.
With the shift in numbers came a shift in mentality. At Johnson Memorial, Heydon found that new recruits--who don't plan to stay for decades--viewed the hospital's pension less favorably than employer contributions to a 401(k) plan.
"The long-tenured folks, yes, they realized they lost a great benefit" when the hospital ended its pension, Heydon said. "The short-tenured folks, they couldn't see that far down the road."
Morrissey would like see to pensions revived. But employers don't see that happening.
Evansville-based Vectren Corp. began closing its pensions to new employees about 10 years ago, said Cox at Vectren.
As pensions have faded, there's almost universal agreement that Americans are not saving enough on their own to maintain their lifestyles throughout retirement.
For more than 10 years, policymakers have been documenting the problem and proposing solutions. But the market crash sped the arrival of those problems and accelerated the need for change, said Marc Sciscoe, an employee benefits attorney at Indianapolis-based Ice Miller LLP.
"All the recession really did is [take] a bad situation--an inevitable situation where people were not saving enough for retirement--and made it worse," he said.
There's little agreement, however, on what a new retirement system should look like.
Some on the left, like Morrissey at the Economic Policy Institute, have proposed "guaranteed retirement accounts." They would be funded by mandatory 5-percent contributions--half provided by each worker and half by his or her employer. The funds would be pooled by the federal government and invested using private money managers.
The federal government would guarantee a stream of income retirement, as it does with the Social Security program, according to a description of the plan written by Teresa Ghilarducci, an economist at the New School for Social Research. She is a former University of Notre Dame professor and trustee of the state Public Employees' Retirement Fund.
Of course, those who make their living providing retirement products and services aren't so eager to see wholesale change.
"The 401(k) or something similar is going to be around for a long time. It simply has to be," said Jim Robison, a principal at White Oak Advisors Inc., a retirement plan adviser in Indianapolis.
But he does predict pension concepts--such as employers' offering some guaranteed income or professional management of pooled investments--will see a resurgence as added features to 401(k)-type plans. He expects companies offering retirement plans to employers will begin pushing such hybrids as soon as the economy recovers.
"We're seeing more clamoring for a variation on the 401(k)," Robison said. "It was beginning to get some traction until things turned south in the markets."
But Heydon, the Johnson Memorial CEO, said more people want choices rather than a guaranteed retirement income.
When Johnson Memorial ended its pension plan, only 15 percent of its employees opted for an annuity plan that would guarantee a certain amount of income each year. The rest took lump-sum payments.
Desires for guaranteed income can be met by such fixed-income investments as bonds, mortgages and preferred stocks, Heydon said. In fact, in 2008, Johnson Memorial's employees shifted more of their savings into fixed-income funds.
"Those type of products will become more and more popular," Heydon said.