It was reported today that only 1 in 7 contributors to defined contribution plans (401(k) and 403(b)) are contributing enough to sustain a reasonable standard of living in retirement. This is compounded by the fact that only about half of our labor force is participating in a DC-type retirement vehicle.
This is clearly an untenable situation for the individual, but equally important for our economy and social structure. Where will demand for goods and services come from if a significant percentage of our population don’t possess the financial wherewithal to be consumers? Furthermore, this places a significant burden on our ability to manage the labor force through a natural evolution.
We urgently need to re-think the elimination of defined benefit plans (DB) in favor of defined contribution structures. In a DB plan the individual participant has little responsible for the ultimate outcome, which is the receipt of a monthly pension check. Regrettably, they possess the entire burden in a DC plan, from contributing, to allocating the assets, to managing the distributions. Why do we think that untrained individuals will handle this responsibility?
The urgent need for education is clear, but the ability for most individuals to self fund these plans is still the greatest challenge. We live in an environment where real wages have stagnated for many years. In addition we have a significant percentage of our potential labor force on the sidelines (94 million age-eligible 16-65 year olds) who are not funding retirement programs. Discretionary income is almost an oxymoron for a vast majority of our citizens.
Ryan ALM Blog 