In the modern, information-based economy, human talent is incredibly important to just about any organization. Finding, recruiting, and retaining that talent is consequently extremely important as well, and businesses have many strategies aimed at retention, from creating diverse and inclusive workspaces to tenure-based bonuses and advancement schemes.
But what ever happened to the ultimate corporate retention tool—the mighty pension? These employer commitments to continue to pay staff after retirement—provided they achieved a certain number of years of employment with the organization—were once a cornerstone of the economics of retirement for millions of Americans.
A Brief History of Pensions in the U.S.
Pensions in corporate America rose to prominence as a key component of employee benefits, providing financial security for retirees in the early 20th century. They gained popularity post-World War II as companies sought to attract and retain talent.
But, by the late 20th century, the burden of funding defined-benefit pension plans led many companies to shift towards defined-contribution plans, like 401(k)s, transferring investment risks to employees.
“Over the past half-century, the 401(k) and IRA have gradually supplanted the pension as tools for most Americans to save for retirement,” writes Daniel de Visé an article for USA Today. “Between 1975 and 2019, the number of people actively participating in private-sector pension plans dwindled from 27 million to fewer than 13 million, according to a congressional report. Modern pensions are largely confined to the public sector, where unions have helped keep them alive.”
This transition marked a significant shift in retirement planning, reflecting broader economic and policy changes impacting corporate America’s approach to employee retirement.
Costs of Pension Programs
According to a survey conducted by Aon, only 12% of employers still offered active pension plans as of 2022.
The primary driver behind the disappearance of private-sector pension plans has been cost. Pensions are a form of defined-benefit (DB) plan through which recipients are guaranteed a specific benefit, typically a percentage of their salary at retirement. By contrast, 401(k) and IRA plans are known as defined-contribution (DC) plans.
While a DB plan places a large financial burden on the employer providing them, DC plans shift much of that financial burden to employees. While employers often match a portion of the contribution an employee makes to their own plan, the employee is typically the one contributing most of the funding.
And these costs have been increasing steadily, not just since the heyday of DB plans a few decades ago, but even in recent years. For example, the U.S. Bureau of Labor Statistics reports that the average cost of providing access to DB plans for employers rose from $2.78 per employee hour worked to $4.48 from 2008 to 2015. In 2015, that cost reflected roughly 60% percent of the then-federally mandated minimum wage of $7.50 per hour.
Pensions as a Retention Tool
The link between pensions and retention should be obvious. Most pension programs only provide the pension if an employee has been with the organization for a sufficient period of time. But aside from the transactional nature of this requirement, advocates of pensions argue they demonstrate strong commitment to staff.
“You’ll stand out to job applicants by offering a pension,” says Erin Lau, director, service operations, northeast region, with Insperity. Because defined benefits plans, such as pensions, are much rarer than 401(k)s, companies can stand out by including them as part of their benefits packages.
Pensions can be a big boon for retention. “You may find employees stay longer as they wait to fully vest in your pension plan,” Lau says. “After all, offering a pension demonstrates a long-term commitment to your team. Not only is there now a bigger financial incentive for new hires to stay, but you also are signaling to employees that you hope your relationship with them will continue, literally, for the rest of their lives.”
Still, despite the potential benefits, adoption lags.
Are Employees Partly to Blame for the Decline?
While many observers focus on the economics of pensions as the driving force behind their downfall, it’s important to also consider the way employees themselves view their careers.
The days where an employee lands a job shortly after graduating from school and remains with that employer for the duration of their career are long gone. It was this largely extinct long-term employee for whom the pension system made the most sense. A pension is a long-term commitment on the part of the employer to reward the long-term commitment of the employee.
Even if pensions in general remained economically viable for such long-term staff, they certainly wouldn’t be economically viable if applied to employees with an average tenure of less than five years. Indeed, traditional pension plans typically required a set number of years of service for an employee to become eligible to receive the pension, often 20 years or more. If employees simply don’t stay with employers that long anymore, the entire pension model fundamentally doesn’t work.
“To resonate with today’s employees, retirement programs must offer flexibility and control,” says Bryan Driscoll, a non-practicing lawyer and HR consultant at Bryan J. Driscoll, JD, LLC. “Traditional pensions, while valuable, may not appeal to a workforce that values mobility and customization. Employers should consider a mix of options to meet varied employee needs.”
Ultimately, it’s time for employers to rethink retirement benefits, Driscoll argues. “The traditional pension model is outdated and not effective in a workforce that changes career, let alone jobs, numerous times throughout their adult life.” Instead of pensions he proposes that employers “prioritize flexible, portable retirement options that empower employees to take charge of their financial future.” This approach, he says, better aligns with modern work patterns and demonstrates a forward-thinking commitment to employee welfare.
Rethinking Pensions
Pensions as we once knew them may be largely dead in the private sector, but that doesn’t mean they need to vanish entirely, argues Jonathan Feniak, General Counsel at LLC Attorney.
Pensions aren’t outdated, but they need to be reimagined to fit today’s market, Feniak says. “A modernized approach can include hybrid plans like cash balance plans, which provide defined benefits linked with investment performance. These structures give employers more control over costs, while still offering employees predictability in retirement.”
The transition from DB pensions to DC plans like 401(k)s marks a significant evolution in how companies approach employee retention and retirement security. This shift, influenced by rising costs and changing workforce dynamics, suggests a need for innovative retirement solutions that resonate with modern employment trends. Adapting retirement benefits to offer flexibility and cater to a mobile workforce could be key in attracting and retaining talent in today’s dynamic job market.
Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.