The impact of the financial crisis on workplace retirement plan balances has led to a reassessment of defined contribution plans and a sense of nostalgia for the guaranteed retirement paycheck that traditional defined benefit pensions provide. As the Obama administration looks at ways to provide Americans with greater retirement security, it should encourage the adoption of innovative private-sector solutions that can strengthen defined contribution plans while preserving the unique benefits these plans provide.
Today's defined contribution pension plans came into existence almost 30 years ago when the federal government revised pension regulations to allow employees and employers to contribute regular wages to tax-deferred retirement savings plans. The original intent of the legislation was not to replace traditional pensions or defined benefit plans. However, as more companies have frozen or terminated their traditional pension plans, defined contribution plans have become the primary retirement savings vehicle for millions of Americans.
During the long bull market in the 1980s and 1990s, 401(k) and other defined contribution plan participants, many with a limited understanding of the financial markets, saw their retirement account balances steadily rise, and came to expect that this would continue. The recovery of the markets after the bursting of the technology bubble reinforced the notion that individually managed retirement accounts offered the best path to financial security in retirement.
Today, things are different. The steep drop in stock prices has dashed the retirement plans of Americans from coast to coast. That this has happened just as the first wave of baby boomers approaches retirement has magnified the problem. Dreams have been scaled back, the idea of early retirement shelved and confidence in a comfortable retirement shaken.
Ideas have been proposed to protect individuals' retirement assets in the future, ranging from overhauling the existing system to completely replacing 401(k)s and other defined contribution plans with a government-mandated retirement savings plan. In the midst of the worst economic downturn in decades, it is not surprising that one of the objectives of these proposals is to replicate the guaranteed income once offered by traditional pensions. Americans need solutions that offer the best of both traditional pension and defined contribution plans. These solutions are available now.