But what’s in it for employers?
That’s one of the main issues with the 401(k) system. There are no real incentives for employers to ensure that their employees are saving enough for retirement, experts say. While employers in years past used pensions and other "welfare benefits" to stave off unions or weaken their influence, that’s less of a problem now, given the weakness of unions in the private sector.
Some companies have a paternalistic culture and feel a social responsibility to do what they can for employees, but they are hardly the majority, says Teresa Ghilarducci, a professor at the New School for Social Research and author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them.
"Employers are finding out that they don’t need to provide retirement benefits in order to keep up productivity and lower turnover," Ghilarducci says. "If they want to do that with their rank and file, they can do it all with offering better health insurance."
The Pension Protection Act does offer a kind of incentive, in the form of protection against regulatory actions, to employers who take actions such as automatically enroll employees in their 401(k) plans and place them in target-date funds as the default option. Employers taking such steps are granted safe harbors from litigation and anti-discrimination rules.
One way to address this issue under the current regulatory structure is by adding more safe harbors for 401(k) plans, says Lori Lucas, defined-contribution practice leader at Callan Associates, an investment consulting company.
"Employers are finding out that they don't need to provide retirement benefits in order to keep up productivity and lower turnover."
—Teresa Ghilarducci, author When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them.
For example, under current law employers are offered a safe harbor if they automatically enroll employees at a 6 percent contribution rate, with a cap at 10 percent.
"I would argue that there is no reason to have a cap," Lucas says. "Many people need to contribute more than 10 percent of their pay to get to a reasonable retirement savings level."
But enhancing safe harbors is not enough to ensure that employers will police employees to make sure they save enough for retirement, says Alicia Munnell, director of the Center for Retirement Research at Boston College.
"That doesn’t stop employees from taking money out of their 401(k) plans," she says. "In hard times like these, there is a huge incentive for employees to take that money out."
From a philosophical standpoint, many employers don’t see it as their role to go beyond offering a best-in-class 401(k) plan, says Alan Glickstein, a senior consultant at Watson Wyatt Worldwide.
"Also, it might not be appropriate to assume that they are going to be in the company’s employment for their entire career," he says. "It’s presumptuous to say, ‘In the five years you work with me, this is the right way to save for retirement.’"
However, as companies begin confronting situations in which they can’t control when employees retire, they are going to have an added incentive, Glickstein says.
"Part of the answer to that is the defined-benefit plan," Glickstein says, adding that he believes many companies will return to offering these plans in the next few years.
Given the markets’ dips and plunges in recent weeks, a guaranteed retirement benefit, such as a defined-benefit plan, may become a more effective recruiting and retention tool, he says.
"I think companies’ need to do better workforce planning, along with the recent market volatility, will result in increased momentum in a swing back to defined-benefit plans," Glickstein says.
Workforce Management, November 3, 2008, p. 30 -- Subscribe Now!