In the late 1980s defined benefit (DB) pension plans were firmly entrenched as the foundation for an employee's retirement security planning. But 401(k) plans had just been awarded long-overdue IRS regulations and were gaining in popularity as a differentiator for companies in their quest for talent.
Among the key selling points for employers reviewing 401(k) plans was that employees were more likely to change jobs than they had been previously and because of this they were served well by benefit portability. It was a feature most pension plans were not positioned to provide as well.
You can take it with you
The portable 401(k) plan looked, to some, to be the best solution. Yet, in some cases, it may be a mistake to assume that portability in and of itself is necessarily the best option for employees or employers.
Let's look at the employee side first. A majority of pension plans based the retirement benefit accrual upon final average pay, while 401(k) plans tend to base benefit accruals on current pay levels. Without doubt, an employee who job-hopped among final-pay pension plan employers would receive a reduced benefit compared to a similarly situated employee who remained at the same employer even if each employer had identical pension plans.
Change the plan or change the structure?
However, this problem is mitigated if the pension plan determines benefits based upon each year's pay, as does a 401(k) plan. Such benefit structures, referred to as career average plans, are not uncommon. If each employer maintained career average plans, then the portable employee would have identical benefits across multiple job environments. This is achievable in both pension and 401(k) environments.
Many times switching from a pension plan to a 401(k) plan does not maintain targeted benefit levels. Most changes have led to, and will continue to lead to, reduced retirement income.
In the next part, I'll take a deeper look at how the march toward portable benefits has led employers toward higher costs and lower shareholder returns.