This Halloween, forget about monsters, witches, and Donald Trumps. Something more dangerous lurks in the night – and it’s not your usual ghoul. Since the 1980s, defined contribution 401(k) plans have been dressed up as good alternatives for retirement savings.
For more than three decades, the private sector has been pushing these risky accounts, depriving millions of Americans of a secure and dignified retirement. What’s most frightening is not only how innocuous these costumes appear, but how easily they change their disguises. And like all good disguises, they’re never telling the whole truth.
Currently, 30 million Americans have no retirement savings plan through work. And when working people are offered something, it’s usually a 401(k) plan. These types of accounts tend to yield lower returns than group accounts like defined benefit plans. And that’s why two-thirds of near retirement households have far less than they will need to retire securely. Sixty-two percent of African American households and sixty-nine percent of Latino households currently have no retirement savings plan. And women are far more likely than men to face financial hardship in retirement due to the perpetual wage gap and lack of access to retirement savings plans.
Defined contribution plans disadvantage regular people and help Wall Street profit. Low-income and middle class workers suffer the most – losing billions of dollars from their retirement savings each year to excessive Wall Street fees. And since working families have to manage their own accounts, they carry all of the financial risk themselves.
While the evidence against 401(k)-style accounts grows, every year there are a handful of politicians who seek to trick firefighters, police officers, nurses, teachers, social workers and others out of defined benefit pension plans and into these accounts.
Following the private sector’s lead, politicians promote these plans as a treat, but employees end up shouldering the financial burden, and taxpayers foot the bill. That’s because politicians don’t disclose the tremendous cost of switching pensions to 401(k)-style plans.
Take, for example, the experience of West Virginia.
Back in 1991, politicians promoted 401(k)-style accounts as a way of saving the state money. Politicians moved all teachers hired after 1991 out of the West Virginia Teachers’ Retirement System and into defined contribution plans. By 2003, the system hit rock bottom, reducing the values of these accounts and putting the retirement savings of the state’s teachers in peril. The experiment failed, and the state has since switched back to a defined benefit pension system.
West Virginia was not the only state to make this mistake. In 2005, Alaska switched to a 401(k)-style defined contribution plan for all new state employees. The liability more than doubled by 2012 and by 2015, the debt to taxpayers reached $13.4 billion and continues to grow today.
Here’s the truth: defined contribution plans cost twice as much for states to provide the same benefits as defined benefit pensions. They are also risky and more expensive for workers and taxpayers, and do not guarantee a secure retirement.
Defined benefit pensions are the most cost-effective plans that provide retirement security to working families. No tricks here: employees pay into the plan, employers put in their contributions, funds are managed professionally, and workers are guaranteed a modest retirement benefit for the rest of their lives.
Tyler Bond is a program assistant at the National Public Pension Coalition.
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