They Want Their 401(k)s

Pensions aren't dead, but their pulse is weak. Here's a look at the demand for the self-directed nest egg, and what you can do to manage the work it entails for you.

December 2, 2000
Eavesdrop for a while at a nurses’station at Mercy Health Services in Baltimore and you’re likely to hear plentyof tips being swapped. A few years ago, those tips were on homey topics likeknitting, child rearing, and recipes. These days, however, the Mercy nurses aremore likely to be talking about 401(k)s, investment strategies, and the stockmarket. 

    “Even the moremature senior nurses have grown to be 401(k) hobbyists. They track it daily,monthly, and quarterly,” says Edward Opet, senior vice president of humanresources for the hospital and its affiliated clinics and doctors’ practices. 

    A scant three yearsago, Mercy switched from a traditional pension plan to a 401(k). That’s whenthe nurses developed their sudden interest in the opinions of Alan Greenspan andthe relative merits of mid-cap stocks versus blue chips. 

    And though Opetpushed for the change so that his employees could take advantage of one of themost popular 401(k) features-portability-he has been delighted to find that thenew plan also has turned into a powerful recruiting tool for Mercy. “We werethe first to do it in the health-care arena [in this market] and it was an extraperk for employees,” he says. “We’re noticing that it’s on the checklistof employees right out of school: Do you have a 401(k), and what is yourmatching contribution?” 

Many Americans seem to be thriving on the responsibility of self-directing their 401(k) assets.

    For most employees,401(k)s are no longer brave and no longer a new world. They’re the standardretirement savings tool, and woe to the employer who clings to his faithful, ifboring, pension plan as the only option. Employers and benefits consultantsagree that 401(k)s have become the norm, and the appeal of the traditionalpension is fading fast. In fact, the widespread enthusiasm for 401(k)s hasturned out to be a catalyst for a whole new mind-set about workplace savings forretirement. 

    Pensions aren’tcompletely dead, but they are definitely the wallflowers at this dance. Longtimeemployees who are vested in their pension plans aren’t seeking ways to ditchthem, but they’re not paying much attention to them, either. A vast proportionof stock is still held by American pension funds, points out W. David Hand, aprincipal with the Houston-based consulting firm Hand Benefits & Trust, Inc.

    Nevertheless, most employees don’t think much about their pensions past acursory glance at the annual statement of account. After all, anonymous fundmanagers are making all the decisions. Employees don’t have to do much excepthope that they get vested, and that’s usually just a matter of hanging aroundlong enough. 

    Conversely, manyAmericans seem to be thriving on the responsibility of self-directing their401(k) assets. Over 53 million Americans participate in 401(k) plans, whichaccount for $2.13 trillion in assets, says Hand. 

    “Who’s pushingfor change? It’s both employees and employers, and they feed off eachother,” explains Tom Schlossberg, CEO of Diversified Investment Advisors, aPurchase, New York, consulting firm specializing in the design and maintenanceof retirement plans. “Ten years ago, every aspect of a retirement plan wasvery different from today, [including] expectations for the plan and retirementitself. You focused on your job and trusted your employer for the futureretirement plan. 

    “We no longercount on employers, and they don’t want to be counted on. We want instantgratification, and total flexibility. In 401(k) plans, each person has anopportunity to influence the amount of money that goes in, and how it’sinvested. Employees can dictate how well the program is invested from the bottomup.” If people still expected retirement to be a twilight of rocking chairsand grandchildren, they might be willing to settle for just a stodgy old pensionand whatever shreds of Social Security are available when they finally throw inthe towel at work. 

    But expectationsabout what retirement is all about are changing dramatically (see sidebar).According to a survey on attitudes about retirement saving sponsored byTransamerica, people expect to accumulate enough money to have lots and lots offun and security. A substantial minority really are expecting golden years: 41percent of Generation X (people now in their 20s and 30s) and 28 percent of babyboomers want to have at least $1 million at their disposal when they retire.Obviously, Social Security isn’t going to get them there. (In fact, mostpeople -- 70 percent -- believe that they can’t rely on Social Security for acomfortable retirement, according to the survey.) 

"The new companies that are entering the Fortune 1000 aren't feeling the need to add a defined-benefit plan as they get big."

    These sky-highexpectations explain why employees aren’t willing to passively watch a pensionfund get managed for them. They want to have only themselves to blame if theirgolden years are anything but. Though the Transamerica survey shows that 58percent of employees are “very satisfied” with their current array ofretirement plans, a whopping 88 percent indicated that they’d rustle upadditional savings strategies if they believed that their employer-sponsoredplan was lacking. 

    Even the mosttradition-bound employers are taking notice, and changing accordingly. Asrecently as 1998, 68 of the Fortune100 companies offered only traditionalpensions, with 22 offering hybrid plans and the rest, defined-contributionplans, reports Eric Lofgren, director of benefits consulting for Watson WyattWorldwide, a Bethesda, Maryland-based human resources consulting firm. Now, halfof them offer just the basic pension plan, and those that offered hybrids arerapidly switching to defined-contribution plans. 

    “The big surpriseto me was that huge jump in defined-contribution plans,” says Lofgren. “Thenew companies that are entering the Fortune 1000, such as retailers and some neweconomy companies, aren’t feeling the need to add a defined-benefit plan asthey get big.” His observation is echoed by other retirement benefitsconsultants, who say that small firms, start-ups, and high-tech companies allshun traditional pensions. He estimates that more than 80 percent of companieswith fewer than 500 employees offer nontraditional pensions. 

    The fact thatdefined-benefit plans almost always reward longevity over job performance israpidly undermining those plans’ appeal, explains Lofgren. People want to seethe rewards of their 80-hour workweeks piling up in their retirement plans now,not take it on faith that they’ll look back in 40 years and be glad that theyslaved so hard at the turn of the century. Employers who want to cater to theexpectations, and gain the appreciation, of younger employees typically weightthe benefits package to vest earlier and provide much more self-direction andportability. After all, younger people are more likely to be facing multiplecareer changes, whereas older workers are generally more settled, says Lofgren. 

    Of course, millionsof workers entered the workforce when longevity was a characteristic of asuccessful term of employment. Those in manufacturing and service jobs oftenwere schooled early on to think of their contributions more in terms of time putin than results achieved. They may be unwilling to give up their pensions, oreven reluctant to give up their pension mind-set, even if the pension itself hasbeen gradually superseded. 

"When you pay more attention to the benefits (appealing) to younger people, you end up with a bigger share of benefits earlier in your service."

    Melissa Squyres, abenefits manager for TECO-Westinghouse Motor Co., in Round Rock, Texas, saysthat older members of the plant’s workforce of 600 appreciate the fact thatthey can count on their unglamorous but faithful pension plan to provide a basefor retirement. Employees at the non-union plant had the opportunity to open a401(k) in 1988, with five different investing options. Now, most of theemployees who were covered only by pensions have retired, and virtually all whoare left have either both plans or, if they were hired from the mid-1990s on,just the 401(k). In only a few more years, the pension will be completely phasedout. 

    But TECO employees,accustomed to letting experts manage their pensions, have transferred thatexpectation to their 401(k)s, says Squyres. A full 41 percent of employeesinvest mainly in bonds. 

    Only 3 percent ofthe plant employees actively manage their 401(k)s, with the rest content toreview their accounts’ progress every once in a while. “Not enough peopleare confident about their investment abilities to jump into it on their own,”she says. 

    Ironically, the verymobility that is a prime feature of 401(k)s may boomerang on job-hoppingemployees if employers get fed up with turnover rates, Lofgren says. The concept of sticking with your employer so that you canbe fully vested might be used by employers to get employees to stay longer.“The turnover numbers are bad enough that you could go back to the traditionalplan,” says Lofgren, only half-jokingly. 

Workforce, December2000, Vol. 79, No. 12, pp. 62-68 Subscribenow!