Thursday, February 8, 2018

Changing Times: Impact of the shift in types of retirement plans

The days are gone when a typical employee works for the same employer for 30 or 40 years and then collects a check every month for the rest of his or her life. Although the majority of employees had little understanding of how a defined benefit plan worked, they knew exactly how much they would get each month at retirement. Together with what they would earn from Social Security, it was relatively easy to plan for the future.

Through the defined benefit plan, employers played an active role in determining, or at least significantly influencing, the standard of living their employees would have in retirement. For the most part, there was little an employee could do, at least through his or her employer, to impact their retirement income. For many people, the combination of their pension plan and Social Security provided sufficient income for their retirement.

The introduction of 401(k) plans in the early 1980s gave employers a retirement savings alternative to offer their employees. Although many 401(k) and similar defined contribution plans (403(b), 457(b)) were offered as a way for employees to supplement their retirement savings, such plans quickly became the dominant plan type in the private sector, far surpassing defined benefit plans.

With the shift in the types of plans being offered came a shift in the roles and responsibilities of the employer and the employee. Many employers still felt that the purpose of a retirement plan was to generate sufficient income to last through the employee’s retirement years, but the majority of the decisions to make that happen shifted to the employee.

Plan sponsors have always had a major role in the design and operation of 401(k) and similar defined contribution plans. Decisions on eligibility requirements, vesting schedules, contribution formulas, and other plan provisions were all the responsibility of the employer. In recent years, regulatory changes have placed even greater responsibility on plan sponsors, including heightened fiduciary responsibilities, fee disclosures, and expanded audit and reporting requirements. Although many of the changes that have occurred have contributed to an overall improvement in defined contribution plans, e.g., fee transparency, introduction of target date funds, etc., little has been done to ensure participants are any more prepared to retire.


Read more in Improving Participant Outcomes: An Action Plan for Plan Sponsors and start developing your action plan to improve participant outcomes. If you have any questions about this white paper, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.