Time for Balance

The December 14 edition of USA Today included a letter headlined, “Stay Away From 401(k),” written by Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees. On December 12, Thomas DiNapoli, New York state comptroller and sole trustee of the New York State Common Retirement Fund, in a speech at the New School's Schwartz Center for Economic Policy Analysis said, "The reality is that 401(k)s were never intended to take the place of pensions. Laws governing state pension funds shouldn't be changed to allow defined contribution plans to replace defined benefit plans because 401(k) plans are woefully inadequate for those who rely on them for their primary retirement income." 

Coincidence? I don’t think so. For the last several years claims that the employer-sponsored defined contribution system is “inadequate” have rained down on us from every quarter.  This has been a significant change from the 1990s when concerns were raised about the 401(k) system but the coverage was generally favorable.  After all, shouldn’t workers be saving for retirement, and what better place than in an employer-sponsored plan? What is going on? The change can be dated to the recommendation by Arnold Schwerzenegger, early in his term as governor, that the pension program for California’s public employees be replaced by a defined contribution approach.

Since Schwerzenegger’s call for change, state and local governments around the country struggling with funding their defined benefit promises have begun considering defined contribution solutions. You may have seen here and there stories about state legislatures considering defined contribution solutions, but only recently has reporting about the struggle over the delivery of retirement benefits to state and local employees gotten national attention. It is clear that attacking the 401(k) system is one tactic used by those supporting traditional pension plans for state and local workers. They fear that if people believe the 401(k) system can be successful, it will be politically easier for elected officials to vote to replace current pension programs with defined contribution plans. They may also fear that support among younger government workers for the current system will erode.

It’s time for balance in the discussion about whether or not defined contribution plans can provide “adequate” retirement benefits. Workers in the private sector change jobs an average of seven times and typically work no longer than 16 years for any one employer. Rather than using a snap shot of the current balance of workers in a private sector 401(k) plan to make the evaluation we should be looking to the results delivered for almost 100 years to participants in the TIAA/CREF defined contribution program.  Have they had “adequate” retirement benefits? You bet.