The Shift from Pensions to 401(k)s
For many decades, traditional defined-benefit pension plans were the gold standard for retirement. Employers promised a set monthly income to employees for life after retirement, with the benefit amount typically determined by factors like salary and years of service. However, since the 1980s, the landscape has fundamentally shifted. Due to rising costs, market volatility, and demographic changes, most private companies have moved away from pensions in favor of defined-contribution plans, such as 401(k)s. This transition places the responsibility of saving and investing directly on the employee's shoulders.
Private Sector Employees
Workers in the private sector are the group most affected by the decline of pensions. The availability of a defined-benefit plan in the private sector is rare today, with only about 15% of workers having access to one in 2023. Even for those who do, many employers have frozen their plans, meaning current employees are no longer accruing new benefits.
Industries with limited pension access:
- Retail and food service: Low-wage and high-turnover industries like retail and food service are among the least likely to offer traditional pension plans.
- Small businesses: The complexity and expense of managing a pension plan make them impractical for many small businesses. Therefore, employees of smaller firms are far less likely to be offered a pension compared to those at large corporations.
- Certain non-unionized roles: While some private-sector unions still negotiate for pension benefits, non-unionized employees are significantly less likely to have access.
Self-Employed Individuals
Entrepreneurs, freelancers, and small business owners who are their own employers do not have a company to provide them with a pension. They are entirely responsible for their own retirement savings. However, the tax code offers several ways for self-employed individuals to save for retirement, such as a Simplified Employee Pension (SEP) IRA or a Solo 401(k), which often allow for higher contribution limits than a standard IRA.
Part-Time and Gig Workers
Workers who do not work full-time are frequently excluded from eligibility for company-sponsored retirement plans, including any traditional pensions that might still exist. Part-time employees and those in the growing gig economy must seek out their own retirement solutions, such as an IRA, to build retirement wealth.
Specific Public Sector Workers
While public sector jobs are known for offering pensions, some employees are exceptions. For example, federal government employees hired after 1987 are typically part of the Federal Employees Retirement System (FERS), a hybrid system that includes Social Security, a basic annuity, and a Thrift Savings Plan (TSP), rather than a pure defined-benefit pension. Furthermore, some state and local government employees may be covered by an alternative pension agreement and are not eligible for Social Security.
Comparison of Defined-Benefit and Defined-Contribution Plans
To understand the shift in the retirement landscape, it's helpful to compare the two main types of employer-sponsored retirement plans.
| Feature | Defined-Benefit Pension Plan | Defined-Contribution Plan (e.g., 401(k)) |
|---|---|---|
| Who contributes? | Employer primarily, sometimes with employee contributions. | Employee primarily, with potential employer match. |
| Who owns the plan? | A pooled fund managed by the employer or a third party. | The employee owns an individual investment account. |
| Guaranteed income? | Yes, a guaranteed monthly income for life. | No, income depends on market performance of investments. |
| Vesting period? | Requires a set number of years of service to be fully vested. | Typically shorter vesting periods, with most employer contributions fully vested within a few years. |
| Transferability? | Not easily portable; ties you to one employer for decades. | Highly portable; you can take your investments with you if you leave your job. |
| Who bears the risk? | The employer bears the market risk. | The employee bears the investment risk. |
| Administrative burden? | High for the employer. | Lower for the employer. |
Planning for Retirement Without a Pension
For the millions of Americans who do not have access to a traditional pension, proactive planning is essential to ensure a comfortable retirement. Here are some key strategies:
- Maximize employer-sponsored plans: If your company offers a 401(k) or similar plan, contribute as much as you can, especially if there is an employer matching program. An employer match is essentially free money for your retirement.
- Open an Individual Retirement Account (IRA): You can supplement your 401(k) with an IRA. A Roth IRA offers tax-free withdrawals in retirement, while a Traditional IRA allows for tax-deductible contributions in the present.
- Consider a Health Savings Account (HSA): If you are enrolled in a high-deductible health plan, an HSA offers a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. After age 65, funds can be withdrawn for any purpose and taxed at your regular income tax rate.
- Invest in taxable brokerage accounts: For those who max out their tax-advantaged accounts or want more liquidity, a standard brokerage account is another option. You can invest in stocks, bonds, and other securities to build wealth.
- Delay Social Security benefits: While you can start receiving Social Security as early as age 62, delaying your claim until age 70 can significantly increase your monthly benefit amount. This is a powerful strategy for increasing a portion of your guaranteed retirement income.
Conclusion
While the concept of a lifelong, employer-funded pension has faded for most workers outside the public sector, retirement security is still achievable. Those who don't get a pension must take control of their financial future by actively participating in defined-contribution plans, utilizing IRAs, and employing smart investment strategies. By understanding the modern retirement landscape and the tools available, you can successfully build a robust nest egg to fund your post-work years.
For more resources on planning for retirement without a pension, including savings strategies and advice on annuities, visit Mutual of Omaha's Guide to Alternative Retirement Plan Strategies.
