Here’s another cliché about retirement plans that needs to be jettisoned: While older workers want traditional pension plans, younger, job-hopping people prefer the flexibility of a 401(k).
That idea, which first gained currency during the mutual fund investing, stock-buying frenzy of the late 1990s, has been dealt a serious blow by two recent surveys from consulting firms Towers Watson and Mercer.
When Towers Watson polled 3,000 full-time employees of large companies last June and July, fully 63 percent of the respondents under age 40 who worked at places with defined benefit plans said that “my company’s retirement program was an important reason I decided to work for my current employer.” Moreover, 72 percent cited their defined benefit plan as “an important reason I will stay with my current employer.”
The percentages were far lower for those who only had a defined contribution plan (28 percent and 36 percent, respectively), indicating that it is the defined benefit pension specifically, and not just any old retirement program — or, for that matter, any job — that these workers value.
Meanwhile, in a survey of 2,400 U.S. workers in October, Mercer found that a retirement plan ranked as the second-most important workplace priority — trailing only base pay — for all people older than 25. The findings are in line with yet another recent survey by Towers Watson that shows workers are willing to save more for retirement, even if it means a smaller paycheck.
“I have been in this business for more than 30 years,” says Arthur Noonan, a senior consultant at Mercer, “and the interest is just vastly different now.”
Now discard one more assumption: The experts don’t think the economy is the main reason.
Instead, Noonan and other pension experts point to young workers’ parents. These aren’t members of the Greatest Generation, retiring to Florida at age 65 with defined benefit pensions accumulated during the postwar heyday. Rather, the mothers and fathers of twenty- and thirty-somethings are the first cohort of the Baby Boom, just hitting retirement age now and struggling to make ends meet on frozen pensions and skimpy 401(k)s — or not retiring at all. “They were the ones whose retirement plans were changing midstream,” says Noonan.
“There is a widespread recognition that a 401(k) is not going to do the job for most workers,” adds Karen Ferguson, director of the Pension Rights Center, an advocacy group for employees. “Maybe younger workers are seeing this reality in their parents and don’t want to see it happen to them.”
To be sure, the recession does play a role in the growing popularity of defined benefit plans, with their reliable monthly payouts. “You’ve had a lot of economic turmoil, and people turn toward stability,” says David Speier, a senior retirement consultant at Towers Watson. After watching their 401(k) portfolios collapse in 2008, adds Noonan, younger workers are thinking, “Wouldn’t it be nice if I had something that insulated me from that market?”
Valuable though a traditional pension may be to younger employees, neither Noonan nor Speier holds out much hope that employers will jump to retain or revive these plans.
They’ve transferred the financial risk to the employee through defined contribution plans, Speier points out. “It’s hard to say that all of a sudden, employers will say, ‘Let’s go back to defined benefits.’ ”
Both consultants predict that there may be some small impact, perhaps a slowdown in the trend toward freezing defined benefit plans. And Ferguson thinks that studies such as these will add impetus to the search for a new kind of retirement plan combining the best of both types.
Certainly, companies need the kinds of benefits that will lure a high-quality work force. But “the first reaction,” Speier says, “is, ‘Let’s find other things that will attract and retain them.’ ”
