Retirement Royalty: Where Workers Still Get a Pension

Traditional pensions are an endangered species. They're not extinct.

For decades now, companies have been killing off their defined-benefit pensions. Instead of the promise of a monthly check from an employer in their old age -- however long that lasts -- workers get access to a voluntary 401(k) contribution plan. Those plans sometimes come with matching contributions from employers, but all the risks of saving enough for a long retirement fall entirely on workers.

As recently as 1998, 60 percent of Fortune 500 companies offered defined-benefit pensions to new hires, according to consulting firm Towers Watson. How many do now, would you say -- 3 percent? Eight percent?

Try 22 percent.

Most of these companies fall into one of two camps, with plenty of overlap. Certain companies and industries still want to give experienced, skilled workers an incentive to stick around. Almost three-fifths of utilities, for example, offer some form of defined-benefit pension to new employees. Utilities are also likelier than companies in other sectors to have unions pushing for strong pensions.

Then there are companies that can afford to take a longer view of their own finances. Pensions are riskier on a year-to-year basis for employers than 401(k)s. Falling markets can result in pension shortfalls that look bad on accounting statements. If the shortfalls are big enough, they may require companies to add funds to the plan.

But over the long term, pension plans are a cheaper way to provide retirement benefits than an equally generous 401(k) plan, says Towers Watson consultant Alan Glickstein. A pooled pension fund is more efficient and can safely take more investment risk than individual savers can. That may be one reason two-thirds of big insurance companies still offer new employees pensions, he says. Many are mutual insurance companies that don't need to answer to shareholders every quarter.

It's always been hard to get a pension at a retailer, a tech company or in other industries where employee turnover is high. And, despite holdouts such as utilities, other employers have adopted their short-term attitude toward workers. The number of Fortune 500 pension plans open to new employees dropped by half since 1998, closing at a rate of 12 a year.

Older employees and retirees generally got to keep their benefits. Most younger workers, however, have no retirement safety net beyond Social Security and a 401(k) plan they must fund themselves. Or they may not even have a 401(k). For half of private-sector workers, the problem isn’t an inadequate retirement plan. It’s no retirement plan at work at all.

Source: Bloomberg