The statistics look grim. Only about 60 percent of eligible workers over 40 participate in their 401(k)s (rates are even lower for young workers), and the number of workers covered by a defined-benefit pension has been in steady decline.
In 1980 there were 95,000 such plans, but by 2004 the number had fallen to just 30,000. Since that time, the percentage of private sector workers covered by defined-benefit pensions has fallen from about 35 percent to under 20 percent.
As a result, most workers under 50 likely won't have a traditional pension.
In recent years, numerous reasonably healthy companies — Verizon, NCR, Lockheed Martin, Hewlett-Packard, Motorola, and most recently IBM, to name a few — opted out of their pension plans. That means the workers at these companies will need to save more to make up for the lost accrual of benefits.
So, earlier this month, government leaders, retirement experts and financial services executives met in Washington to discuss what employers, lawmakers and workers can do to help Americans better prepare for retirement.
The summit was sponsored by the Department of Labor, which is concerned about the ability of Americans to adequately fund their golden years. That concern drove the Department to recently publish a booklet called 'Taking the Mystery Out of Retirement Planning' to help educate the public.
Congress is considering legislation that would encourage all employers to offer automatic enrollment in 401(k)s and set the default contribution rate at 3 percent of pay, increasing one percentage point every year until 6 percent of pay is reached.
The legislation would also encourage companies to offer a 50 percent matching contribution or contribute 2 percent of pay for all employees whether they contribute or not.
The first wave of Baby Boomers will begin to retire in just two years, when they turn 62. Then, in 2011, an onslaught of retirements will begin, lasting nearly twenty years. But, according to research by Fidelity Investments, only 57 percent of Boomers expect to receive a pension.
And Fidelity says that Boomers only have enough in savings and other income sources to replace 59 percent of their pre-retirement income. Of those with 401(k) accounts, the average account balance is just $80,000, and many typically save just $2,750 a year toward retirement.
That won't go far.
There may not be much that can be done for workers over 50 who've lost their pensions and haven't prepared adequately, but an automatic 401(k) program could mean a great deal to workers under 40.
History has shown that most people do little, if anything at all, in the way of retirement planning — until it's too late. Young workers have difficulty imagining themselves in 30 or 40 years.
Such is youth.
But most retirement experts contend that adequate retirement planning needs to begin around the age of 30. An IRA is recommended, though they are under-utilized. And with pensions becoming extinct, a more widespread use of 401(k)s could help the nation fend off a looming retirement crisis.
Social Security withholdings are already automatic for most American workers, so an additional two percent to six percent withholding for a 401(k) could be easily executed.
Though it's hard to say just what the Congress would do to "encourage" employers to offer automatic enrollment in such a program, not to mention get them to offer a matching contribution, the good news is that this critical dialogue has finally begun.
Copyright © 2006 Sean M. Kennedy. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the author's consent.
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