401(k) Boondoggle

Mary Williams Walsh of the New York Times reports on the impacts of the 401(k) boondoggle on the net worth of the median older household:

More than two-thirds of older households -- those headed by people 47 to 64 -- had someone earning a pension in 1983. By 2001, fewer than half did. . . .

. . . Retirement benefits today, particularly the 401(k) account, simply are not worth as much as the older kind of benefits. Some studies suggest otherwise, but they tend to rely on average balances of retirement accounts, and the averages have been skewed upward by the extraordinary gains of a few wealthy households.

When the holdings of more typical households are tracked instead, today's near-retirees turn out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983. The sweeping change in employee compensation appears to be the reason, according to new research by Edward N. Wolff, an economist at New York University who analyzed 18 years of household financial data collected by the Federal Reserve.

Mr. Wolff found that the average net worth of an older household grew 44 percent, adjusted for inflation, from 1983 to 2001, to $673,000. But much of that growth was in the accounts of the richest households, which pushed the averages up. When Mr. Wolff looked at the net worth of the median older household -- the one at the midpoint of the economic ladder, a better indicator of what is typical -- the picture changed. That figure declined by 2.2 percent, or $4,000, during the period, to $199,900. . . .

In 1985, about 115,000 American companies had traditional pension plans. As of last year, only about 31,000 did. Of those, many are thought to have frozen the benefits, pension specialists say, so that additional years of service no longer build a bigger pension. Others have closed their plans to new employees, or reduced their benefits formulas. Precise data on such changes are nonexistent, but Daniel L. McCaw, chief executive of Mercer Human Resource Consulting, said in Congressional testimony this year that as many as a quarter of surviving pension plans were either frozen or on the brink of a freeze. (Mary Williams Walsh, "Healthier and Wiser? Sure, but Not Wealthier," New York Times, June 13, 2004)

That's hardly news for those who have been following the consequences of the shirt from defined-benefit to defined-contribution pension plans, but the New York Times article comes with a vivid chart.

Note that the 401(k) generation's assets are much more vulnerable to market volatility, too. Sharp rises in interest rates, for instance, can cool the housing market and even wipe out the gains in home equity wealth, at the same time as making debt payments more onerous (cf. "The Day of Reckoning on the Home Front," June 4, 2004).

Increasing retirement insecurity of the 401(k) generation has been a great boon to employers, who succeeded in cutting their spending on workers' retirement:

On average, employers who set up 401(k)s have cut their retirement spending by 14%, according to an analysis of corporate tax filings between 1981 and 1996 by University of Notre Dame economist Teresa Ghilarducci and two colleagues. "We found 401(k)s are a cost-savings move for employers," she says.

As a result, workers must foot more of the bill for their own retirement. With companies covering fewer workers, and paying less for those they do cover, employers' overall spending on retirement has plunged by 22% since 1986, to an average of 83 cents an hour, according to the Labor Dept. study. (Aaron Bernstein, "K.O.'d by the 401(k)," Businessweek, July 29, 2002)

See, also, Teresa Ghilarducci, Steve Nyce, and Wei Sun, "Employer Pension Contributions and 401(k) Plans" (2002).