Saturday, July 13

Pensions Get a New Look From Younger Workers

In an economy characterized by a volatile stock market and elevated inflation, a sure thing looks better than ever. For some Americans in the labor force right now, that looks like a pension.

Striking members of the United Automobile Workers union made waves this year when the union’s leaders demanded the reopening of defined-benefit pension plans for workers hired after late 2007. Although U.A.W. leadership failed to persuade automakers to reopen the plans, the bold move didn’t go unnoticed by retirement benefit experts.

“It was interesting that U.A.W. did mention that in their negotiations, because that isn’t really something you would have seen 10 years ago,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, a nonprofit organization.

Only about one in 10 Americans working in the private sector today participates in a defined-benefit pension plan, while roughly half contribute to 401(k)-type, defined-contribution plans, which are funded with their pretax dollars and, in many cases, employer contributions.

Experts say the shortcomings of defined-contribution plans, with their assets invested by employees themselves, are more apparent in the current economic climate.

“Many American workers are seeing that it’s a lot harder to have those accounts work,” said Josh Cohen, head of client solutions for PGIM DC Solutions, a division of Prudential Financial. “That’s heightened with market volatility, inflation and increased longevity.”

The competitive labor market has prompted more job hunters to seek out employers that offer richer benefits. The jobs platform Indeed found that over the past three years, people looking for work have increased searches for pensions by roughly 12 percent.

There are indications that companies are increasingly responding. Indeed also found that, while the number of job postings that mention pensions remains low, that figure has shot up roughly 130 percent over the past three years.

Even before the pandemic and its economic upheaval, there was evidence that employees — including young Americans who entered the work force after 401(k)s became dominant — placed a high value on defined-benefit pensions. A report published in 2020 by the National Institute on Retirement Security found that more than four out of five millennials working in the public sector cited pensions as a key reason for staying in their jobs.

The jobs platform Glassdoor found that employers with pensions had an edge over rivals in employee satisfaction, which can improve recruitment and retention. Employers offering pensions have earned consistently higher ratings on the site over the past decade. Benefit ratings for jobs with pensions averaged 4.37 out of a possible 5, compared with 4.21 for jobs without pension benefits.

“I would characterize that as a pretty large and persistent advantage,” said Daniel Zhao, lead economist at Glassdoor.

For Jessica Steinbach, the chance to take a job with a pension right out of college was a “crazy-amazing opportunity.”

Although Ms. Steinbach, 27, earned a college degree in the performing arts, she works as an assistant naturalist for the parks department of Dutchess County in the Hudson River Valley of New York, where she runs educational programs for children and adults.

Ms. Steinbach said her parents had helped her see the long-term benefit of participating in a pension plan starting from a young age.

“My parents said the stability of having a county job with a pension would be great,” she said. “They expressed how rare that is.” Her peers find it surprising, too.

She said that seeing her parents get closer to retirement gave her a better long-term perspective. “Thirty years isn’t that long, and it snuck up on them, so it will sneak up on me,” she said, adding that she appreciates the guarantee of an additional income stream to supplement Social Security when she is older. “It does feel slightly more stable to have the pension.”

Although pensions are still common in public-sector jobs, they are nearly absent in the private sector. But there are hints that the tide could be turning.

In November, IBM announced a significant change to the way it structures its retirement benefits. The company is a benefits bellwether in corporate America. It was one of the first to offer a 401(k), in 1983. IBM is keeping its 401(k) plan, but beginning next year, it will eliminate matching contributions of up to 6 percent. Instead, it will contribute 5 percent of each worker’s pay into a defined-benefit instrument.

This retirement benefit account, as the company is calling it, differs from traditional defined-benefit pensions in that its structure is that of a cash-balance account, in which the accrued value is expressed as a dollar amount. Workers earn credit each year, typically a percentage of their salary plus an interest rate pegged to a benchmark like a particular Treasury yield.

“To me, this is a little bit of a back-to-the-future movement, where IBM, in a sense, is going back in time,” said John Rekenthaler, vice president of research at the investment research firm Morningstar. “It’s a different structure, but it has a little bit of an old-school feel.”

Employees who don’t currently contribute to a retirement account are poised to see the greatest advantage from this switch, said Michael Archer, head of the retirement business for North America at WTW, a benefits advisory firm.

“In defined-contribution plans, most require the employee to contribute to get a contribution from the employer, but the problem with that common approach is many employees that are lower paid or younger find it very difficult to make those contributions,” Mr. Archer said.

Conversely, a primary drawback of traditional defined-benefit pensions is that they are structured to reward workers who spend their entire career with the same employer — a career model not especially well suited to today’s young, mobile work force.

Defined-benefit plans structured as cash-balance plans, such as IBM’s, let workers accrue money for retirement consistently without requiring a tenure measured in decades. “Cash balance plans are built to increase portability so you can take a lump sum when you leave,” said Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management.

Another disadvantage of traditional defined-benefit pensions is that payments stop when the worker — or the worker’s spouse — dies. While workers with 401(k)s risk outliving their savings, they can designate a beneficiary to receive the funds after their death.

One possible solution, benefits experts say, is for companies to offer some sort of hybrid retirement package that includes both defined-benefit and defined-contribution elements. In a report co-written by Mr. Gross and published this year by J.P. Morgan Asset Management, analysts suggested that large companies with dormant pension plans — either closed or still paying out to older retirees but inaccessible to younger workers — could reap benefits by reopening or unfreezing those plans as a complement to a defined-contribution plan.

“I think the likely path is that this is in addition to a D.C. plan,” Mr. Gross said. “What we’re likely to see going forward is a parallel structure.”

While economists point to signs of slowing momentum in the labor market as potential evidence that workers’ retirement gains may be short-lived, they also note that continual baby boomer retirement waves mean employers will need to compete more fiercely to hire and keep employees.

“Structurally, the trend in the long run is that workers are going to be more valuable, especially when we think about the kinds of industries that are going to need more workers in the future,” Mr. Zhao, the Glassdoor economist, said. He noted continued strength in sectors, such as health care, that rely on in-person work that can’t be automated or outsourced.

“When you go through periods of volatility or inflation,” Mr. Gross said, “or for people who are concerned about the adequacy of their retirement savings, the perception of defined-benefit plans rises because they provide long-term, stable income.”

Two additional worries — the viability of Social Security and mounting government debt — are weighing on the minds of young workers and investors today, and the prospect of a guaranteed return becomes more appealing.

“With this shift in this higher-inflation environment, you’re getting more people cognizant of what is it going to cost to live in retirement,” said Ned McGuire, a managing director at the investment advisory firm Wilshire. “Employees are starting to catch on to the fact that retirement is unpredictable and potentially very expensive.”

There are indications that young adults are increasingly concerned about the reliability of Social Security. In a Nationwide Retirement Institute survey, 45 percent of adults younger than 27 said they didn’t believe they would receive any money from the program.

“If you’re a 20-year-old and you’re looking at your future life span, you don’t necessarily know that you’re going to collect a Social Security benefit at the same level that your parents are receiving,” Mr. McGuire said. “It’s just so much more in the zeitgeist.”