With the traditional pension plan in
doubt, more workers must depend on themselves, not their
companies, to fund their retirements.
The question now: Are they prepared for the challenge?
People taking charge of their nest eggs with 401(k)
retirement plans tend to save too little, start too late and
make poor decisions, such as putting heaps of money in their
companies' stocks - remember Enron? - or being too aggressive.
Many investors also are in the dark about the fees they pay
for the savings plans.
All of that has stoked worries that current workers may not
live as comfortably as they hope when they finally leave the
work force and retire.
"I can tell you, people don't have enough saved,"
said Anne Delle Donne, a financial planner with MJ Smith &
Associates in Douglas County. "I've got a 60-year-old who
has only $50,000, $60,000 in his 401(k), and he's retiring in
five years. This is it."
Times have changed.
Just ask Nelson Phelps, who oversees a U S West retiree group
in Denver. Phelps joined Mountain States Telephone and Telegraph
in 1966. That company later became a part of U S West, which was
acquired by Denver-based Qwest Communications in 2000.
"There was a day when you knew you'd be taken care
of," said Phelps, who retired from U S West in 1990.
"That's one of the reasons I went to work for the
company," he said. "But the newer breed of employees
isn't going to have that anymore."
More than 42 million Americans now have a total of nearly
$1.9 trillion invested in 401(k) plans, according to a study by
the Employee Benefits Research Institute and the Investment
By contrast, 22.4 million Americans had 401(k) plans in 1992.
The defined-benefit pension - the fixed monthly payments
based on years of service and pay level - was once a plan on
which most people could rely.
Yet in recent years it has faded fast. While many older
workers and retirees like Phelps have both a 401(k) and a
pension, younger generations probably will have to accept life
without those secure monthly checks.
All new workers for companies such as IBM and Avaya, for
instance, will be offered a 401(k) instead of a pension under
Phelps understands the value of an old-fashioned pension, but
he is quick to note that the 401(k) system delivers flexibility
to workers who want to hop around to better job opportunities as
well as potentially big payoffs to those who save prudently.
"I don't think it's all bad, quite frankly," said
Phelps, whose group keeps an eye on Qwest's pension. Phelps has
worried about the way Qwest handled its pension fund, which had
gone from a big surplus to a deficit but is now fully funded.
Education efforts also raise awareness about retirement
planning, and some companies are giving employees the option of
turning over the tough investment decisions to professional
How much is enough?
Many companies see the pension fund as a burden, worried
about having the assets to meet their obligations as the ranks
of retirees swell. Steep stock market declines and low interest
rates left huge numbers of plans underfunded.
The 401(k) has risen as a more attractive and predictable,
and often less costly, alternative.
"Pension plans are almost a dinosaur," said Mark
Brown of Denver- based financial planning firm Brown &
Rolled out in the early 1980s, 401(k) plans, named for a
section of the tax code, allow employees to take control of the
wheel and receive tax advantages. Typically, an employer
contributes to the plan as well, but does not bear the risk.
It also seems to be what employees want. Traditional pension
plans were seen as an incentive to stay at a company, but these
days, people tend to leap from job to job, making a 401(k) more
One worry, though, is that investors aren't socking enough
The numbers back up the concerns. Personal saving as a
percentage of disposable income was 0.2 percent in October, down
from 0.3 percent the prior month. It was the lowest rate since
Statistics and anecdotal evidence suggest many individuals
also are betting too heavily on their own companies' stocks.
The Employee Benefit Research Institute's study found 53
percent of 401(k) accounts have more than 10 percent of their
assets in company stock, while more than 10 percent of accounts
had more than 90 percent of their assets in company stock.
In addition, people in some plans may face relatively high
Fees typically range from 0.5 percent to 2 percent of the
assets invested in the plan. But experts said average investors,
and many employers, too, are unaware because they aren't
It may come as no surprise, but retirees polled by Putnam
Investments said they wished they had done more to prepare.
About 60 percent of retirees said they should have started
"The most important finding of the study is that advice
to save early and save more has not been heeded by the vast
majority of retirees," Richard Geist, clinical instructor
in the Department of Psychiatry at the Harvard Medical School
and president of the Institute of Psychology and Investing, said
in the report.
"As a result, we need to develop new, creative ways to
help younger workers talk about and learn about money in a
manner that leads to maximizing their long-term financial
strategies," said Geist, who was a consultant on the
Many people also fail to anticipate how much they'll need to
live comfortably and set aside far too little or - on the other
end of the spectrum - they are too frugal.
A traditional pension is steady. There is no worry that
people will outlive their money.
With a 401(k), the golden years are far more uncertain.
"People don't know how long they are going to
live," said Don Fuerst, a principal at Mercer Human
Resource Consulting in Denver.
"If you live a long and healthy life, it's too
bad," he added. "You may run out of money. If you die
earlier, you could have saved too much."