Why we Face a Retirement Train Wreck

Listen to many experts like New College Professor Teresa Ghilarducci and you might think that the current retirement crisis is the fault of defined contribution plans like 401ks. But a retirement blogger points outs the four economic factors that have led to our current retirement issues.

Many people bemoan the demise of defined benefit pension plans where you worked for a company your entire career and then received a monthly check for the rest of your life. In reality, at their height, DB plans were only offered by 40% of companies and only 18% or workers stayed at the company long enough to get the benefit. Many workers stayed at a company just for the pension plan even if they were unhappy or might have had better career opportunities. Millennials today stay at their employer less than three years so DB plans don’t make sense in today’s mobile economy where most job growth is coming from smaller companies.

So what are the real culprits for the current retirement train wreck?

1. Life expectancy has risen from 68 in 1950 to 78 in 2009, a big driver of why companies stopped offering DB plans.
2. Middle class income has basically flat lined for all but the high earners when inflation is considered.
3. Just as income has flat lined, healthcare costs have risen which makes sense as people live longer.
4. People don’t save enough. Millennials have a hard time even thinking about retirement and, with stagnant wages, baby boomers and Gen X/Yers have had a hard time saving enough.

The other issue with DC plans is that risk cannot be pooled like with DB plans. Solutions include incorporating the best of DB plans into DC plans like:

1. Ideal Plan where people are automatically enrolled, escalated and put into professionally managing investments like target date funds augmented by a stretch match.
2. Greater portability and ease of consolidating disparate DC accounts and IRAs using roll-ins.
3. Affordable retirement income leveraging pooling rather than just rolling money into largely unsupervised and unregulated IRAs.
4. More engaged and educated plan sponsors and participants using technology and adult learning techniques as well as corporate sponsored financial wellness programs focused on financial literacy.

So don’t blame DC plans for the cause of the retirement train wreck unless we do nothing to help address the issues – now that we know.