Retirement savings looked a lot different for our parents’ generation than it does for our own. Why, a few decades ago, it was the responsibility of employers to offer secure a retirement in the form of defined benefit plans or pensions. Today it’s the employees who must take the reins to ensure they’re financially secure in retirement.
When and why did this shift in thinking occur? And what does it mean for today’s workforce? Let’s take a look at how saving for retirement has evolved over the years.
Early 19th Century
Up until the late 1800s, anyone who had to work for a living pretty much had to do so until they died. A notable exception was the military, as the practice of offering a pension to retiring soldiers dated back to the Roman Empire in the first century B.C. In the mid-1800s some larger cities also began to offer disability and retirement income to police officers and firefighters and then, later, other public sector workers.
The American Express Co. introduced the very first private pension plan for elderly workers and people with disabilities. By 1926, roughly 200 employers had adopted a private pension plan. These weren’t designed to replace an employee’s entire salary at retirement, merely a small percentage.
Post World War II
Large corporations began to take a paternal approach towards their employees and pensions gained a great deal of traction during the boom that followed the war. These retirement benefits were offered as part of companies’ recruitment and retention efforts. It paid off too, as during that time it was common for employees to work for one employer for their entire career (compared to 2014 when the average employee tenure was less than 5 years).
Retirement benefits continued to increase in attractiveness, offering retirement incomes that came much closer to covering employees’ average salary. By the 70s, 45 percent of all private sector employees were covered by a pension plan of some kind (a total of 26.3 million workers). Those stats remained relatively unchanged all the way up to 1990.
Retirement benefits up until this time had been defined benefit plans which gave employees little control over their retirement income. The only way to receive more benefits was to work longer, earn more money, or live longer. But the contributions and investments were all controlled by the employer.
Introducing The Revenue Act of 1978 whose Section 401(k) allowed for the establishment of defined contribution plans. Now employees could contribute their own money to a retirement fund with tax advantages to supplement any other retirement benefits they had, and employers could also contribute.
The past 38 years have been a steady shift away from defined benefit plans in favor of defined contribution plans, placing more and more responsibility on employees for saving for their retirement. Traditional pensions are disappearing at a rapid pace. Only 31 percent of the working population has access to one.
The plus side is that individuals’ opportunities are limitless for amassing a large savings for retirement. The downside is that many workers are unprepared or, at the very least, underprepared. A recent Financial Finesse survey found that only 22 percent of employees say they’re confident about retirement, even though 84 percent contribute to a retirement plan.
There have been initiatives to increase preparedness, such as auto-enrollment and auto-escalation. But these measures don’t seem to be doing enough. What’s needed the most is retirement education to help employees better plan for the future. This financial wellness is an integral part of reducing employees’ stress levels and contributing to their overall well-being.
If we can help educate you and your employees about the many options available, give us a call today.