Striking Over the Risks of Retirement Savings

You, like nearly 75 million other Americans, are probably saving for retirement by investing in mutual or index funds offered in a 401(k). Defined contribution plans, including 401(k) plans, hold an estimated $4.5 trillion in assets.

Yet Boeing's technicians rejected Boeing's contract offer and voted to strike over the discontinuation of pension benefits and conversion to 401(k) plans for new employees. In the coming weeks, Boeing will renew negotiations with the technicians to convince them to accept the 401(k) plan approved by the engineers on February 19.

The looming Boeing strike is, in part, a fight about who should assume the risks and costs of retirement planning. Other defined contribution plans and 401(k) plans, while popular among employers and acceptable to many employees, change how retirement benefits are funded and shift certain risks onto participants that otherwise are carried by employers offering traditional pensions.

Most traditional pension plans provide employer-guaranteed benefits at retirement, until death, and are thought of as "output" plans. Pension plans are protected by the robust federal Employee Retirement Income Security Act (ERISA), and payments, up to a certain amount, are guaranteed by the federally-sponsored Pension Benefit Guaranty Board.

In contrast, most 401(k)-style plans are "input" plans where employers provide investment vehicles into which the employee contributes. Contributions plus or minus gains or losses make up the account balance, which is the total benefit paid at retirement. While 401(k)s are governed by ERISA, there is no federal guarantee of retirement benefits and there are reduced fiduciary duties for retirement plans where employees pick the investments.

Risks include market performance, the upside can be an increasing account balance; the downside is a falling market and dramatically reduced savings, like many experienced during the 2008 financial crisis. It is this risk that Boeing wants to avoid, citing market volatility and uncertain future contribution costs (paying more if the market tanks) as the justification for offering new employees only 401(k) benefits.

Additionally, workers in a 401(k) plan face significant information risks because they must appropriately calculate retirement needs, save the required amount over their working life, invest those assets in the right vehicles, avoid market losses and then manage their benefits from retirement until death. How well can American employees shoulder these risks and responsibilities when a 2012 Securities and Exchange Commission report found that American investors lack essential knowledge of the most rudimentary financial concepts; inflation, bond prices, interest rates, mortgages and risks -- risks that have a serious, adverse affect on retirement savings.

Employees in 401(k) plans bear the risk of living longer when they receive a lump-sum payment at retirement, not benefits until death. Employees also pay many administrative fees associated with 401(k) plans that employers traditionally covered under pension plans.

Finally, 401(k) plans also allow participants to make pre-retirement withdrawal, subject to a penalty. These withdrawals erode savings, yet one in four American households do so for non-retirement spending needs.

On the other hand, 401(k) plans provide a way to save for retirement, which is positive. Because 401(k) benefits are automatically vested, employees can change jobs or retire early without losing benefits. But when you add together all these factors, are 401(k) the benefit many of us think of them as, or are the risks something to be skeptical of, like the Boeing technical workers are?

The rise of the 401(k) plan as a dominant retirement savings vehicle -- a trend since the late 1980s -- has created a defined contribution society. How well American workers bear the risks will determine both individual and national financial security. In light of recent news that 62 percent of Americans, ages 45 to 60, say they plan to delay retirement -- up from 42 percent in 2010 -- signals both a graying workforce and an uncertain retirement landscape.

The threatened Boeing strike should make us take stock of what risks are posed to our individual nest eggs. The quiet retirement revolution of the 401(k) has the potential for negative consequences if workers save too little, raid accounts for non-retirement spending and fail to understand the significant risks that they bear under the system.