Americans’ Retirement Benefits ‘Slashed’ Since 2001

Americans’ Retirement Benefits ‘Slashed’ Since 2001

Although US employers’ contributions to their employees’ 401(k) plans appear to be growing, Americans’ overall retirement benefits have fallen sharply in the past decade and a half as more organizations shifted from defined-benefit pensions to defined-contribution plans like the 401(k), Bloomberg’s Ben Steverman reported last week, citing a new report from Willis Towers Watson:

Retirement benefits — including employer contributions to pensions, 401(k)s and retiree health-care benefits — fell from 9.1% of worker pay in 2001 to 6.8% in 2015. Spending on traditional pensions plunged 76%, to less than 1% of worker pay. Medical benefits for retired workers became increasingly scant, falling from 1.2% of worker pay to just 0.2%.

The good news is that many companies, while shutting down or freezing pension plans, have sweetened their 401(k) matching contributions. … But higher 401(k) matches aren’t making up for the loss of other retirement benefits overall, and even the most generous 401(k) plans usually lack a traditional pension’s biggest selling point: a guaranteed income for life. With a 401(k), it’s up to individual workers to figure out how much they should be saving — and how to make the money last, once they’ve retired.

This doesn’t necessarily mean employers are spending less on employee benefits, but rather that more of their money is going toward health insurance instead: Willis Towers Watson found that average spending on health care as a percentage of employees’ pay increased from 5.7 percent to 11.5 percent between 2001 and 2015. “Unfortunately,” Steverman adds, “the rising cost of health care is hitting Americans twice” as the cost of insurance is leaving them and their employers with less money to invest in retirement planning, and as they face even higher medical bills in retirement if current cost trends continue.

Willis Towers Watson’s findings come as even some of the original proponents of the 401(k) plan have come to question its adequacy as a retirement savings vehicle. Even with both employers and employees increasing their contributions, and more employees being auto-enrolled in 401(k)s, critics of the these defined-contribution plans say most working Americans can’t handle current expenses like health care and child care while also putting away enough of their income to guarantee themselves a secure retirement. The retirement savings gap is one reason why more Americans are now working, or planning to work, well into their golden years.

One thing employers can do to help solve this problem is to improve their employees’ financial literacy and understanding of how retirement savings plans work. A recent study from Fidelity Investments found that most US employees have significant misunderstandings about basic concepts in personal finance and retirement planning, suggesting that employers could make a difference in educating the workforce on how to make the most of their savings and benefits.