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Rekenthaler Report

America's Retirement System: Winners and Losers

The prognosis isn't worse than in the past, but it is different.

So Far, So Good
Tuesday's column disputed a recent Financial Times claim that moving the U.S. retirement system from one based on defined-benefit pensions to defined-contribution plans (which, for simplicity's sake, I will henceforth refer to as 401(k) plans) has harmed American seniors. On the contrary: Poverty rates for retirees are historically low, both in absolute terms and when compared with those of other age groups.

The FT's assertion was not new. For decades there has been a ready, steady supply of articles about America's "retirement crisis." The belief has long been common. To date, however, it has not become true. Relatively speaking, retirees are faring better than ever before.

(On the surface, it seems odd that the generational winners tend to be portrayed as being the losers. But seniors punch above their weight. They have a higher net worth than others; per the Federal Reserve, households headed by seniors have a median net worth of $250,000, as opposed to $100,000 for the national average. They also consume far more financial media, and they vote more often. Birds that squawk get fed.)

Looking Forward
However, as several readers pointed out, my argument spoke to what has been, not what may become. It absolved 401(k)s from current blame, but not from future criticism. Perhaps my column was the equivalent of those 2006 articles that boasted about the safety of diversified portfolios of residential real estate, because until then housing downturns had always been regional. That would be embarrassing.

There's no easy to way to respond to that critique. Probably not even a hard way. Predicting demographic effects is akin to forecasting next summer's weather pattern. No matter how much data are collected and how much computing power is used, the output is speculative because of what cannot be known--that being the changes that will occur between now and the prediction's date.

History's Judgment
Still, one can make the attempt. This is my take on how the history will be written. Forty years from now, retirement experts will acknowledge that relying on an incomplete and voluntary defined-contribution retirement system left huge gaps. Tens of millions of American workers lacked access to 401(k) plans, while tens of millions more had the opportunity but declined to participate. Many of those workers salvaged their retirements by other means, such as having a wealthier spouse, tapping into their home equity, or moving in with relatives. But not all.

The experts will then discuss those who were ill-served by 401(k) plans: People who lacked a college education. For the most part, such workers either held lower-wage positions at large companies, or they were employed by small firms that had limited benefits. Some pieced together part-time jobs, while others yet were self-employed. The common element was that they rarely held well-paid positions at major organizations--places that inevitably had 401(k) programs, with automated enrollment and high participation rates.

After acknowledging that failure, the experts will state that, in the grand scheme of things, the significance of the evolution from defined-benefit to defined-contribution plans was overstated. The defined-benefit scheme, too, had its share of failures. Most were the same as with the 401(k) system: society's outsiders. Those laboring on farms, or stitching garments as seamstresses, or knocking on doors to sell brushes. However, there was one significant difference--one case where the losers became winners, and those who had previously won were left behind.

Trading Places
The new winner was the itinerant college-educated employee. Under the defined-benefit system, such workers bounced from company to company, earning a respectable salary, but not gaining retirement benefits. As investing at the time was mostly done by the upper class, rather than the broad middle class, these restless Americans were likely to find themselves at age 65 subsisting on Social Security and the kindness of others.

(To insert a personal note, this indeed was my parents' situation. They had four degrees between them, but no pension except for a small teachers' annuity, and no savings. They resolved the situation the old-fashioned way: My father died early, and then my mother remarried to somebody who had some money. It worked, in a way, but I would hesitate to call that a retirement "plan.")

With the change to 401(k) plans, the mobile college-educated employees accumulated meaningful retirement assets. Each company they joined dropped them into a 401(k) plan--typically into a target-date fund--and automatically deducted contributions from their paychecks. While no more patient than their predecessors, meaning they rarely thought about retirement issues, these workers generally stayed the course. Opting out of the plans involved effort.

Their gain came at another's loss. Left behind by the transition were the stable blue-collar union workers--those who devoted their working lives to a single company, often in their hometown. Once, they had enjoyed both competitive salaries and excellent retirement benefits. As the country's manufacturing base shrank, though, and traditional pensions discontinued, such workers no longer rated as among the retirement system's major winners. They were displaced, moving from the inside to the outside.

A Political Choice
Overall, then, the much-discussed evolution from pensions to 401(k)s had little effect. Of course, it was hugely important at the individual level. Some people fared much better for the change, while others fared much worse. But the broad picture remained similar. The voluntary, market-driven retirement-planning schemes that the United States used to supplement Social Security had mixed results. They hit some targets exactly, others partially, and still others not at all.

That is how I think the retirement history will be written, assuming that the laws remain as they now exist. The U.S. can--and should--assist the 401(k) system's outsiders by passing simple, low-cost legislation. But those would be enhancements, not an overhaul. Creating wholesale change would require greater government involvement, by mandating that which is now voluntary. Which is a political decision, and thus outside the scope of this column.

Never Say Never
On Tuesday, Arthur Ashkin shared the Nobel Prize in physics. He is the oldest-ever Nobelist, at age 96. Ashkin informed the Nobel committee that he would probably not do many interviews, because he was "very busy" completing his latest paper. 

Count me as impressed. 


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.