What It Really Means to Have Only a 401(k) Plan for Your Retirement

Originally posted May 2009.

The SHRM article titled “Milestone: Most Fortune 100 Firms Offer Only 401(k)s to Salaried New Hires“, shares that for the first time more than half (that would be 55) of the Fortune 100 companies offer only 401(k) plans to newly hired salaried workers. The only thing that surprises us about this statistic is how long it was in coming. 401(k) plans grew in popularity with employees (well, at least until account balance growth slowed, stopped and then reversed) and were popular with companies looking to avoid the balance sheet implications of pension plans. It’s been over 25 years now since section 401(k) was added to the internal revenue code and changed the relationship between workers and organizations, ultimately giving employees responsibility for their own retirement.

Employees have a difficult time making investment decisions; and therefore when the markets are down so are account balances. Employee communications have always stressed the company match and tax deferred status of contributions and investments and loans and then, of course, the employees’ ability to trade their account daily (even though participants have no understanding of how to invest). In fact, companies weren’t and still aren’t permitted to provide “investment advice” which of course is pretty much the ONLY thing that employees needed to make the right decisions. We can’t count the number of times people asked: “Ok, I understand all that stuff you said about the funds, but WHERE SHOULD I PUT MY MONEY????” Sorry – that’s where the regulations require that employers draw the line – employers can provide info not insight and god forbid they cross the line into providing investment advice, because that’s the arena for the professionals. And with most 401(k) balances down over 50% this past year those professionals have sure done a great job! (Pardon my sarcasm.)

So now we have another generation: that of new hires at Fortune 100 firms, to face a life with only 401(k) for retirement. However, that “milestone” ignores the tens of thousands of employees in the thousands of companies who offered only “k” plans for years and now those employees face decimated retirement funds and long, long working lives.

Initially, employees loved “k” plans because they provide “portability” of benefits. That was when jobs were plentiful and changing jobs meant getting a sign-on bonus, a bigger paycheck and carrying forward your retirement savings from your prior employer. But what does “portability” really mean in a recession where jobs are scarce and the recovery is years away? For executive level and key employees, there will always be unique supplemental bonus plans and reward programs to support them. For the “average Joe” we are talking about being a disposable worker. In these times, which for some are desperate times, the lack of a pension plan, and its security isn’t nearly as important as a paycheck. The long-term employer-employee loyalty “contract” is over. The pension plan was the last vestige of that mutual relationship. Employers aren’t concerned about employees’ long term welfare and if jobs weren’t so scare, employees would look for the next paycheck bump that might be waiting at the next job.

Many of us barely remember that our parents, or maybe grandparents, worked their lives in one company. Personally, my father came home from WWII having served his country in the Pacific with the Navy. He started working for a company and 37 years later he retired from that same place. Also, when I graduated from college some of my college buddies took their newly minted BA’s to jobs at IBM. I remember hearing from them that (at that time) IBM had a “no lay off policy”. These recollections of employee and employer loyalty seem a distant past.

One employment trend that I see with some of my clients is they have begun to commit to “employability” not employment for their workers. It’s not a “no layoff policy”, which based on IBM’s experience is a hollow promise at best. Rather employers are structuring programs for retraining, retooling and renewing employees’ skills to help them be better prepared for the jobs of the future. This is an important move from “guaranteed employment” to “a commitment to employability”.

Another trend is for organizations to have layered or “onion-like” workforces. In this environment, core positions requiring critical organizational capabilities have reward programs that provide employers the means to select, retain and motivate the very best candidates and align their interests with those of the shareholders. Each of the additional layers away from the center is progressively less critical to company success and each has different reward programs and objectives.

We expect that ultimately the workforce structure of the future will be all about adaptability. Today neither workforces nor reward programs have adaptability built in.

Technology is also driving the change in employer-employee relationships. Think about how many jobs have been replaced with technology solutions in just the past couple years, now think about that over the past 25 years – whether it’s voice response systems that replace Customer Service Reps, online shopping that replaces retail sales people, or new technologies in manufacturing that take workers off the line, we have done much to improve efficiency in business. The workers at the margin of this technology boom are the ones at the greatest risk of losing their jobs. Other more specialized jobs aren’t “tech replaceable” today but we can’t expect that 25 years from now a computer chip won’t be doing those jobs too.

With statistics showing that loyalty is critically correlated to company performance what might the dissolution of the “employer-employee loyalty pact” and the loss of pension plans mean for companies long term? The next “talent shortage” will likely show us that when employers don’t take a long-term interest in employees, then employee will feel the same and if technology can’t replace critical and key employees who feel their company isn’t loyal to them, then recruiting and new hire orientation processes had better be streamlined and highly effective.

So how can your company deal with the current environment and prepare for the next stage of the economy? Perhaps it’s time to review and rethink your total reward strategy. Are your programs linked with your business strategy? Are they flexible and adaptable? Would your organization benefit from a layered or “onion-like” rewards structure? Perhaps it’s time to rethink vesting, REALLY rethink it. Consider “vest and rest” pay programs.

Flexibility in workforce deployment and rewards structure is no longer a competitive advantage, it’s a competitive necessity. Contact Grahall, we can help you think through this from compensation structures, to authoritative research, to learning opportunities, to temporary support, we have the depth of experience and expanse of services to help you through this important transition.