Gone are the days when a company-funded pension could get workers through retirement.
Here instead are the days when employees, not the employers, are responsible for planning their retirement – and more than ever they are.
For the first time in history, American workers are now putting more into their retirement funds than their employers. The change from company funded defined-benefit pension plans to 401ks, SIMPLE IRAs, and other investment methods, has come steadily over the last decade.
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"In the last generation people didn’t have do to any saving," said Richard Watson, owner of Watson Financial in North Kingstown. "In today’s environment, while most companies will help, it is the primary responsibility of the individual to save. The responsibility has really moved from the corporation to the people themselves."
The Employment Retirement Security Act of 1974, still used as the basis for government regulation of retirement planning, was initially designed to provide supplemental coverage for the American workers. Now more than two decades and several amendments later, the plan has been praised by many for achieving financial retirement security, and criticized by others who feel it has virtually eliminated traditional pensions.
According to the Employee Benefit Research Institute, the percentage of families with a pension plan who have defined benefit coverage or a plan that promises to provide a specified amount once they have worked a certain amount of time and are ready to retire, has decreased from 62.5 percent in 1992 to 43.1 percent in 1998. In contrast the number of families participating in a 401k, or cash deferred plan that allows them to contribute pre-tax dollars to a retirement plan has more than doubled from 31.6 percent in 1992 to 64.3 percent in 1998.
"Traditional pension plans were really popular until companies realized just how expensive they were," said Heather Conklin, manager of retirement planning services at Progressive Financial Strategies in Providence. "And with all the news about Social Security not being able to last there has really been a shift from the philosophy that other people are going to take care of you to you need to do more for yourself."
Paul Long, of the Mass Mutual Financial Group, agreed.
"What was happening is that the defined benefits programs were getting out of control for companies," he said. "They are very tough to maintain, very demanding, and very expensive. The idea was to put the onus on the employees, show them how to pick their funds and let them make the decisions."
It’s a big responsibility that has gained attention recently as employees of Enron, which invested much of the company’s retirement plan in its own stock, have found themselves with barely any retirement savings.
What hurt employees of Enron is that many selected the company as their only investment and when their stock declined to nothing they found themselves with nothing left in their plan," Watson said. "To some extent those employees made that decision, and hurt themselves."
The key to successful retirement planning, all agree, is diversification.
"You have to set up a good menu," Long said. "You need to know what your needs are and have some understanding of how to get there. That usually includes investing in a number of funds."
Even before Enron, Long said, some people were feeling the effects of not diversifying.
"People got hammered recently because they bought a lot of high-tech stocks," he said. "It’s not going to work as well unless you are diversified. It’s something you should be looking at least once a year or once every two years."
On the positive side, the 401k and other cash deferred plans have allowed for more flexibility in the job market.
"People are moving jobs more than they used to and the traditional pension plans didn’t accommodate that," Conklin said. "They needed something more portable and the cash-deferred plan seems to be the answer because it can move with you."
And while retirement used to be something people only dreamed about until age 65, it’s now something they should begin planning for when they first begin working, according to local advisors.
"It’s unlikely that your expenses will decline in retirement," said Watson. "If you are accustomed to living on $50,000 a year then you will have to put aside significant money in your retirement plan. The key point is that responsibility for this has shifted from the employer to the individual."
