Over the past couple of years, nearly 20 profitable corporations have either excluded newly hired employees from participating in their pension plan or ended further pension accruals for workers already on the job.
What would make IBM and Verizon take such drastic action? Simply put, it's an attempt to remain competitive with domestic and foreign rivals that have lower labor costs, as well as to offset the rising cost of health insurance. In addition, many companies don't want to take on the financial risk of having to pay benefits to retirees who could live for decades.
When IBM froze its pension plan, says Alicia Munnell, director of the Center for Retirement Research at Boston College, "that removed the social stigma" and paved the way for other companies to follow suit. If you have a traditional pension plan, says Munnell, you should assume that it will disappear.
But even as some firms are retreating from their pension promises, others are stepping up their efforts to help employees save for themselves. Recent innovations in 401(k) retirement plans, such as enrolling new employees automatically and offering professionally managed mutual funds targeted to a specific retirement date, make a big difference. Companies that offer automatic enrollment report a 14-percent higher participation rate than companies that don't, reports a survey by Hewitt Associates.
Last year, the average 401(k) account balance grew by more than 10 percent, to nearly $76,000. And 78 percent of employees who participated in their company's 401(k) plan contributed enough of their own money to get the full company match.
But the Hewitt survey found that one-third of employees contributed only the amount needed to capture the company match — and that's not enough. Advisers at T. Rowe Price, a major provider of 401(k) plans, recommend that workers try to save at least 15 percent of their salary — including employer contributions — right from the beginning of their careers to build adequate retirement savings. If you get a late start, you'll need to put away even more or plan to work longer.
Munnell says that staying on the job is "a powerful antidote" to reduced income in retirement. "By working until Social Security's full retirement age or beyond, you don't incur reduced benefits," she says. "Your 401(k) balance will build for a few more years, and you'll reduce the number of years you have to rely on your savings."