Human Resources: Executive Summary: Retirement Benefits

The world of retirement benefits is changing fast due to factors such as the evolving structure of pension plans, low workers' savings, and the aging of the workforce, to cite just some of the most high-profile issues.

Among longstanding trends is the shift from defined benefit plans to defined contribution plans, or hybrid plans, which combine elements of both. But even as such plans give employees greater responsibility for their savings, there's little indication that U.S. employees are saving nearly enough. In fact, as many as 40% of U.S. workers are not currently saving for retirement, according to a 2004 survey conducted by the Employee Benefit Research Institute (EBRI). This proportion is virtually unchanged from 2001.

What's more, even many of the people who do save say their savings and investments are meager. EBRI data indicates that 45% of employees have less than $25,000 saved for retirement. If these patterns continue, employees will have to work longer and play catch-up by increasing contributions to savings plans in the future.

On the brighter side, employer contributions rose to 4.4% of payroll in 2003, up from 2.5% in 2002 and 3.3% in 1999, according to data from Towers Perrin. The majority (82%) of eligible workers have balances in their 401(k) plans, and funding levels improved for pension plans in 2003. "During the mid- to late 1990s, the booming capital markets led to significant increases in the funded levels of company pension plans, putting the typical plan into a surplus position. This was followed by a major capital market downturn during the 2000 to 2002 period," said Steve Kerstein, managing director of Towers Perrin's HR Services business global retirement consulting practice. "Despite this volatility, after the most recent year's positive results, capital market conditions put pension plan sponsors in approximately the same funded position today as they were in at the end of 1995."

Still, the Pension Benefit Guaranty Corp., the federal agency insuring the pensions of 44 million Americans, saw its deficit bloat to an enormous $23.3 billion in 2004. Some experts predict that the deficit may grow as high as $50 billion in the next decade.

It's possible that a stronger economy and new legislation in the near future will improve these situations, but recent trends make clear that it's critical for workers to fully understand their retirement needs and what they can do to enhance their future security. As employees realize they must manage their own funds, financial education has gained in popularity. And since corporate fraud and terrorism concerns wreaked havoc on U.S. 401(k) savings several years ago, professionals say saving for education and training is now among the top five most important benefits-related issues.

Most employees will need help in their retirement years. A study by EBRI finds nearly half of all current U.S. retirees depend solely on Social Security to cover living expenses during retirement, while two-thirds rely on it to supplement savings. The EBRI report also discloses that the number of employers offering retirement healthcare benefits has declined, with many newer companies electing not to offer healthcare benefits at all.

Many cuts and changes to plans add up to this: employers are striving to contain retirement benefit costs - or at least make them more equitable between younger and older employees - even as large numbers of Baby Boomer employees approach their retirement years. To some degree, this has led to conflicts. In one case, employees sued IBM when the company switched to a cash balance plan offering more savings for younger employees, and a federal court ruled the plan violated age discrimination laws. Such cases demonstrate that employers must be careful about the design and implementation of new retirement benefit plans.

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