If you grew up in the 70’s you may have been lucky enough to own a pair of bell bottoms and are most certainly guilty of spinning some disco music while doing your best Travolta in front of your bedroom mirror. You probably also remember people around you bragging about the pension they would receive in retirement. As fast as Madonna cassette tapes replaced Bee Gee’s records, these retirement pension plans started to go extinct. During the late 60’s and early 70’s, nearly 50% of large companies in the US offered their employees a pension plan. These pensions promised employees a guaranteed income stream for the rest of their lives when they retired. A paycheck for the rest of your life, even after you stopped working, and all you had to do was put in your time? That’s a powerful proposition.
So what happened? Why did companies start to terminate these cushy plans that offered such tremendous retirement security? What motivated employers to go in a different direction? The first and most glaring reason was simply the high cost of maintaining such plans. The intense planning that went into making sure such long term commitments could be met came with a hefty price tag. When you lump that together with high inflation, a bear market and the introduction of a shiny new option, it created a perfect storm.
This shiny new option I mentioned above wasn’t so shiny at first. In 1978, the federal government enacted the Revenue Act that, most notably for this conversation, added section 401(k) to the internal revenue code. Ironically, section 401(k) was never meant to be what we know it to be today. It was seen as a way for employers to create a tax advantaged savings account for it’s employees and really wasn’t given too much attention. It wasn’t until Todd Benna of Johnson Companies used section 401(k) to craft a plan where employers could offer a way for their employees to contribute to their retirement pre-tax. This created a movement that would soon make 401(k) synonymous with employer retirement plans and by 1983 nearly half of large US companies offered such plans.
Today 401(k) plans hold nearly $5 trillion in assets and there are very few pension plans left. This was not only a very quick and major shift in the plans that companies were offering but also a big shift in retirement planning responsibility. The responsibility of planning a pension plan completely belonged to the employer and when they moved away from the pension and changed to a 401(k) plan it shifted the responsibility of planning for retirement completely to the employee. With this shift in responsibility came a shift in mindset as well. With a pension plan, employees knew if they put in their time they would retire with guaranteed income streams. They had very little knowledge and connection to how their employers would keep these plans solvent and meeting their promises of a carefree retirement. Now we are saving for retirement ourselves. We have full knowledge of what we have saved and how the market effects these savings and because of this some of us associate our retirement planning almost entirely with investing. Investing is, of course, a very important part of creating a retirement plan but many times this investment mindset distracts us from many of the other very important parts of a successful retirement plan.
Next month I will talk more about these other important aspects of planning and how their consideration may reshape our mindset and position us for a better and more successful retirement.