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The Rising Price of a Cheap Retirement Plan

January 18, 2012

For about 20 years, employers could erode the quality of their retirement benefits without paying much of a price. Those days are over. And wise employers are seeing greater retirement security for workers as a goal that helps both employees and the organization.

During the 1990s and 2000s, companies moved away from defined benefit pension plans as if they were the plague. It was part of the deteriorating bond between employer and employee, and it had a certain logic: Traditional pension plans cost companies a lot and carried big financial liabilities.

The advent of the 401(k), also known as a defined contribution plan, seemed like a perfect alternative. They trimmed company risk dramatically and could be touted as a worker-friendly portable retirement benefit.

Some labor advocates screamed, but most workers went along without much of a fight. After all, most young people don't think about retirement. Companies seemed to offer matching 401(k) contributions at similar levels, and it was hard to compare plan quality.

For years, employers would talk about how great their health care plan was and then, as an afterthought, mention that they had a 401(k) plan as well.

But times have changed. For one thing, transparency has come to retirement benefits. Research service BrightScope Inc. in recent years has allowed employees to compare the generosity, quality and cost of different companies' 401(k) plans.

And employees care like never before about those plans. The Great Recession destroyed 401(k) nest eggs as the stock market cratered and many people were forced to treat their retirement plans as piggy banks. The economic crisis also shined a spotlight on wider problems around 401(k)s: Workers tend not to invest enough in them or make smart investment decisions.

The bottom line, as my colleague Rita Pyrillis reports in the upcoming February issue, is that 51 percent of working-age households are at risk of not having enough retirement income to maintain their standard of living in retirement, according to the Center for Retirement Research at Boston College.

Employees have gotten the message. Even young ones want the security of a traditional pension. Last year, we reported that a study by research firm Towers Watson & Co. found that nearly two-thirds of workers under 40 said defined benefit plans are a key factor in their decision to stay with their companies compared with only a quarter of those with defined contribution plans. This quest for retirement security is part of a broader desire for economic stability in the wake of years of economic tumult.

America's estimated $6.6 trillion "retirement income deficit" isn't just a problem for workers. It also threatens companies, because older, costly workers may linger in their jobs just because they can't afford to retire.

In other words, retirement benefits are increasingly vital for the entire employee lifecycle: recruitment, retention and retirement.

So as workers search for more retirement stability, forward-looking companies are trying to give it to them. There's growing interest in hybrid plans such as cash-balance plans, which offer a measure of certainty to retirement benefits.

Some employers, such as transportation firm Union Pacific Corp., continue to offer a defined benefit plan. Maybe your organization doesn't have to go that far. But it's clear that companies can no longer get by with a cheap retirement benefit and expect employees not to notice. Eventually you will pay, one way or another.

Ed Frauenheim is Workforce Management's senior editor. To comment, write to efrauenheim@workforce.com.