With 77 million baby boomers headed for retirement, nearly every facet of corporate pension plans will be subject to analysis and change.
The decline in defined benefit plans and the rise in defined contribution plans—combined with increasing longevity—is creating growing risk among employees regarding their retirement benefits.
As retirement benefits are redesigned for today’s retirees, it’s unclear whether employer programs can support long-term financial security, notes an analysis by The Conference Board. The report is based on presentations and discussions by senior HR executives attending a special Pensions and Retirement Conference held by The Conference Board.
“The changing definition of retirement raises controversial questions, especially from a societal point of view,” notes the report, which focuses on some of the difficult questions being asked today and offers controversial as well as conventional viewpoints. “What is the responsibility of the corporation to provide a safe and secure retirement for its employees? The evolving social contract between employees and employers has resulted in many issues that plan sponsors, policymakers and academics need to resolve. We are asking employees—who should be seen as consumers, not investors—to take on significant risks that they haven’t a clue on how to manage.”
The Pension and Retirement Dilemma
Legislation, including the Pension Protection Act of 2006, liberalized requirements for defined contribution plans. Many experts disagree over whether the new rules for defined benefit plans will help stabilize the system or encourage more companies to curtail their plans. Executives attending the conference pointed out that as more companies discontinue their defined benefit plans, they’ll need to change their overall retirement programs so they work more effectively for employees.
The risk is twofold.
The first concern: employees will outlive their retirement income and will experience a significant decline in their standard of living as they move from the accumulation phase. This is entirely possible, as many people are underestimating their life expectancy and overestimating how much money they can draw from savings. Employees are facing new responsibilities for managing retirement assets, distribution options and the payout period, and many are unable to manage the process effectively.
The other danger is that employees are investing more than they should in equities, due in part to the limited options for their defined contribution monies, inflation and market volatility. Even though many employers are using target fund dates, some experts believe that these funds — which have been endorsed by the Department of Labor and the Employee Benefits Security Administration for default investment options — are generally too risky for the average employee. The report helps readers understand key points of controversy.
