NCPA - National Center for Policy Analysis

As Markets Tumbled, Pension Plans Outdistanced 401(k)s

August 16, 2002

The stock market began its long climb in the early 1980s, just about the time 401(k) retirement plans began to be introduced. Employers began offering 401(k)s in lieu of traditional guaranteed-income pension plans -- and workers flocked to them.

But after the market's two-year tumble, many workers have seen their 401(k) assets eaten away, and -- as they delay the date they expect to retire -- they are looking enviously at their pension-holding peers.

  • More than six in 10 U.S. workers with retirement coverage rely primarily on 401(k)s and similar retirement plans.
  • Even before this year's bear market, total assets in 401(k)s dropped 10% from 1999 to 2001, to $1.64 trillion (including new contributions) according to Cerulli Associates, a Boston consulting firm -- and with about three-quarters of all 401(k) assets in stocks assets dropped at least a further 9% this year.
  • But many unionized workers, including those in state and local governments and the auto and airline industry, stuck with the old approach -- an assured payout based on salary and years of service.
  • Some observers predict increasing political pressure on firms to bring back traditional pension plans.

Many businesses, however, have little interest in returning to the old days because the cost of guaranteeing a worker a fixed monthly payment for a lifetime of retirement cannot be easily or accurately calculated.

Some congressional Democrats are set to consider legislation over the next year that would prod companies to pool together to offer traditional pension plans that workers could carry from one job to another. One possibility is offering tax incentives to companies that elect to do so.

Source: John Hechinger, "Market's Swoon Boosts Pensions Over 401(k) Plans," Wall Street Journal, August 16, 2002.


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