Retirement’s future: pension vs. 401(k)

About a dozen chief executive officers of public employee pension funds met in Chicago last month to get acquainted and discuss ways to defend the traditional pension model.

It was an unprecedented gathering called by the new CEO of CalPERS, Anne Stausboll, who in January became the first woman to hold the top job at the nation’s largest public pension fund.

After an historic market crash last fall erased a third of the value of many pension funds, the CEOs might have talked about adjusting investment portfolios or “smoothing” techniques that could avoid contribution rate shocks for state and local governments.

But professional staffs can present those options to decision makers on pension boards. What the CEOs did was compare notes on handling a public discussion about retirement security that may be pushed by the Obama administration and others.

“I’m anticipating that when that discussion heats up, they will be coming to the public pension funds to talk about the defined benefit model, how has it worked historically,” said Stausboll. “So it’s a good opportunity for us to be giving some messages about the relevance of the defined benefit design.”



A “defined benefit” is the monthly payment guaranteed for life in a traditional pension. It’s opposite is the “defined contribution,” a 401(k)-style plan that puts money into a tax-deferred individual investment plan that can rise and fall with the market.

The “defined benefit” is the standard retirement plan for government employees. Critics contend that powerful public employee unions have negotiated generous retirement plans that are straining government budgets and may be unsustainable.

Businesses that offer retirement plans (about half of U.S. workers only have Social Security) are moving toward 401(k)-style plans, avoiding the potential for a massive pension debt that has hurt the auto industry and other old-line corporations.

The 401(k)-style plan is portable, moving with workers as they go from job to job in the new economy, where career-long employment with one firm is said to be increasingly less likely.

But critics say the 401(k)-style plan was only intended to be a supplement, and the stock market crash dramatically revealed its shortcomings, devastating the holdings of older persons who cannot wait for investment earnings to rebuild their retirement funds.

So, if it’s “defined benefit” versus “defined contribution,” who’s winning? Both sides sound as if they are feeling a little besieged.

“In addition to talking about the national discussion, we did talk about the negative focus that we have seen in the media and various forums around defined benefit plans,” Stausboll said of the Chicago meeting.

“We talked about what we could do to balance those negative stories,” said the new CEO of the California Public Employees Retirement System. “But again, in an educating kind of way based on our experience.”

The Profit Sharing/401k Council of America shares Stausboll’s view about a coming national discussiion of retirement, calling on its website for a stronger voice because “the future of the 401(k) system” may be determined by the current Congress.

“Not only have investment returns recently been poor, but the media has piled on with story after story about how 401(k) itself is the problem,” David Wray, the council president wrote on his web log. “However, the real story is that 401(k) participants continue to save and invest in their plans even in what some term the worst of times.”

The debate over retirement models, with its subtext of government versus private-sector control, takes a number of forms.

A CEO who attended the one-day Chicago meeting on May 4 in an airport hotel, Chris DeRose of the Ohio Public Employees Retirement System, said in recent years he has discussed retirement issues with the Legislature, Congress and system members.

“We have reached out to all of our stakeholders in helping them to understand that there is this challenge and there are people who want to change our plan, whether they want to change how we invest our money or whether they think a mandatory defined contribution plan is the way to go,” DeRose said.

Comment on Calpensions posts from “Bull,” often denunciations of government pensions with words in all-cap letters, are e-mail that can be traced to a large financial firm in New York that sells retirement products.

A new group, Retirement USA, which includes the Service Employees International Union and several think tank-like organizations, launched a drive earlier this year for a new plan to supplement Social Security.

The new group, seeking ideas to be considered at a conference this fall, has proposed a framework that combines traditional pensions and 401(k) plans (with perhaps some new wrinkles) that would be supported by employers, workers and the government.

The California Assembly passed a bill this month authorizing CalPERS to handle the investments for a new savings retirement plan for workers who do not have an employer-sponsored plan.

AB 125 by Assemblyman Kevin De Leon, D-Los Angeles, would allow automatic deductions from paychecks, an option regarded as a key to getting people to save. A similar bill, also opposed by the financial industry, cleared the Assembly last year and died in the Senate.

U.S. Treasury Secretary Timothy Geithner said last month that his office wants to work with Congress “to flesh out the initiatives” in the president’s budget to help the half of working Americans who only have Social Security.

“These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage,” he told the House appropriations committee on May 21.

A hybrid plan that would use an annuity to convert part of a 401(k) savings account into guaranteed monthly income is being discussed by a Geithner assistant, Mark Iwry, who formerly was with the Brookings Institution.

“It’s in the early stages, but there has been a fair amount of interest in our ideas and the core concepts so far,” Iwry told Investment News last month.

A legal affairs newsletter said the appointment of Iwry in late April signals that retirement has become a higher priority in the Obama administration’s Treasury department.

“Policy issues Iwry will be working on include a possible overhaul of rules for private defined contribution plans, funding relief for defined benefit plans, a direct-deposit IRA program for employers that don’t offer retirement plans, and expansion of the saver’s tax credit,” said the CCH Financial Crisis News Center newsletter.

That would be a sweeping agenda. And as with the current health care debate, there would be plenty of room for political conflict over whether retirement programs should be run mainly by the government or by the private sector.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 15 Jun 09

11 Responses to “Retirement’s future: pension vs. 401(k)”

  1. bull Says:

    Blah BlaH Blah …….

    The bottom line is that the Private Sector SHOULD NOT for forced (via their Taxes) to fund MUCH RICHER Pensions (and Retiree health care) for Civil Servants than they get for themselves.

    Civil Servants, encouraged by their unions, and enabled by self-serving, contribution-soliciting vote-selling politicians, are a VERY greedy bunch.

  2. Dr. Mark H. Shapiro Says:

    We have all seen how great 401K’s are during the past couple of years. The problem is not how good are public sector retirement plans, but how bad are private sector retirement plans.

    For a long time American workers in the private sector had decent, defined benefit retirement plans. That was until they were sold a bill of goods on 401Ks. Now many, many American workers in the private sector have seen their retirement savings disappear.

    Here in California the average public sector pension is about $25,000 a year and 75% of that comes from earnings on pension fund investments, another 12 to 13% comes from EMPLOYEE contributions. Only about 12 cents on the pension dollar actually comes from taxpayers.

  3. Dr. Mark H. Shapiro Says:

    I can understand why “Bull” (the pseudonym for a firm that peddles 401K products) doesn’t like defined benefit plans. The costs associated with the defined benefit plans are very small compared to the high fees associated with 401K plans. The financial industry, those people who helped to collapse our economy, rake off big bucks from 401Ks even though their performance usually is worse than that of defined benefit managers.

  4. George Says:

    Pension vs. 401(k) is missing the point — almost all of those pension plans (including Social Security) are doomed due to the lack of fiscal sanity in DC.

    The US Debt bubble and dollar crisis along with taxes will destroy all of any remaining value in those pension plans.

    This is the path we are on — Congress has chosen this path, by default
    or design, pick one.

    In saving today you have a choice of avoiding two of the following:

    – taxes
    – inflation
    – risk

    Actual saving requires avoiding all three.

    Without inflation and taxes retirement savings has no reason to be in the stock market (or any fancy financial products).

    He should be just in cash, or possible some really secure bonds. Saving over a lifetime can easily support a reasonable retirement.

    The major push into the stock market is due to the pressure from inflation and taxes (both created by Congress). Inflation makes bonds a certain loss if not a wipeout. Fix the currency and government spending and pensions won’t be a problem.

  5. Wayne Martin Says:

    Because of labor unions, government salary and benefits have doubled every 10-12 years. Public sector salaries routinely range between $100K-$250K, with pensions linked to the highest year’s salary. Most government employees will make more in their retirement years than in their working years.

    Over thirty years, CalPERS retirees receive the following payouts:

    Total Pension Payouts

    $100K–10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.2M
    $150K–10-Years: $1.7M | 20-Years: $3.7M | 30-Years: $6.2M
    $200K–10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M
    $250K–10-Years: $2.8M | 20-Years: $6.2M | 30-Years: $10.3M

    There is simply no way that school districts and city governments can pay the retirement contributions of their employees without increasing taxes/fees/fines for everything associated with government. Taxpayers already see about 65% of their income subject to statutory taxes. Government at all levels has been diverting about 40% of GDP for its needs in the past. Obamanomics has driven this number to 50%, and some believe he will push it higher in the future.

    Public sector salaries must be reduced, and pensions delinked from salaries to keep Government finances from being overwhelmed. This will not be easy, but over time, it can be done.

  6. Bob Hayes Says:

    I agree with the points made by Wayne Martin. However, the cause of this problem is the fact that we have public employee unions. We should not accept this because the “playing field” is not even. The public unions always win whatever the issues are because of their power. Until the country realizes that these unions must be eliminated, our problems such as this one will continue.

  7. Leonard Says:

    Bull “should not…for forced”? My friend you can’t write a sentence of coherent english. What third world country are you from? And don’t they have their own pension problems for you to worry about?

  8. gobbledegook Says:

    Enough Leonard!

  9. Ryan Says:

    Where do some of you guys get this information you’re throwing around?

    Wayne – “Public sector salaries routinely range between $100K-$250K”

    Really? While I don’t doubt that some of the top administrators of my California university make somewhere in that range (probably the top top making even more), the average salary for the rank and file majority is about 45k. Me personally, I’m IT so I make a little more than average but even so I’ll probably never see 6 figures in my working career. But if I was in the private sector, I’d easily be making 6 figures by now.

    Bob – “The public unions always win whatever the issues are because of their power”

    I can’t speak for all public unions, but I can for ours. This is how salary “negotiations” go in a “good” year:

    Union – We want 14.7% increases in pay for our members! We are below market average!

    California Legislature – We’ve carved out 1.15% for your members this year. You’re getting 1.15%.

    Union – What? That’s not even keeping up with inflation! OK, we’ll come down to a 12.9% increase.

    California Legislature – You’re getting 1.15%.

    Union – OK, we settle for 8.9%.

    California Legislature – You’re getting 1.15%.

    Union – Well members, it was a long and hard fought negotiation, but we’re happy to report that we’re getting 1.15% increases this year!

    And in a “bad” year (like this one):

    Union – But our 3-year contract that you signed a couple years ago said we would get a 2.9% raise this year!

    California Legislature – Well, you see this fine print? It says “depending on funding”… well, we just don’t have the funding… sorry.

    Union – (sound of crickets)

    California Legislature – Oh yeah, by the way, you have to take 24 furlough days this year at the equivalent of a 10% pay cut or we’re going to initiate layoffs and cut 40% of you staff and faculty.

  10. SWW Says:

    Ryan, u r not getting 5 figures because a. you r still young b. you r sucks at what u r doing and I seriously doubt it you can work in private sector.

    Union + defined pension benefits as Wayne Martin above said is THE ultimate problem. No politicians will ever elected if he/she want to eliminate the DPB. In business when times are good we give bonus to our employees, times are not good we layoff people. We copay 401K our employees manage their own money, when times come we depart and we owe nobody and we can’t promise we’ll give you money till you die. But our government were hijack by public employee union long ago, we can let this continue for a little longer it will stop one way or another. It’s just unsustainable.

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