The do-it-yourself retirement has largely failed. Swapping traditional pensions for 401(k) plans sounded good while markets were roaring. But 15 years of choppy returns has brought us full circle: Most workers now say no benefit would be more valuable than guaranteed retirement income.
Four in five employees would forfeit at least 5% of their salary, and half of those would give up 10%, if it meant securing guaranteed monthly income in retirement, according to the Bank of America Merrill Lynch 2013 Workplace Benefits Report.
This is a vastly altered landscape relative to the 1980s and 1990s, when the bull market fostered an equity culture that was all about wealth building. Steady income was for wimps. This culture was perhaps best captured in the famous words of Peter Lynch when he said “gentlemen who prefer bonds don’t know what they are missing.” Millions of people figured their stocks would keep going up and they’d have no trouble managing withdrawals from their tax-favored savings accounts in retirement.
But it didn’t quite work out that way, and today the call for guaranteed income—something approximating the traditional pension—is louder than ever. Nearly all workers believe their 401(k) plan should have a guaranteed income option and three-in-four employers believe it is their responsibility to provide one, according to a BlackRock survey.
This development is loaded with irony. For one thing, even where guaranteed-income products are available within retirement plans, employees have been slow to opt for them. And guaranteed income is easily purchased outside a plan in the form of a fixed annuity—though 5% to 10% of pay probably isn’t sufficient. If workers want it so badly why don’t they just go buy it?
“People like the concept of guaranteed income,” says Steve Ulian, managing director of institutional retirement and benefit services at Bank of America Merrill Lynch. “But they often have difficulty correlating it to a product.”
This suggests a yawning need for more financial education in the workplace, which is also evident in the Bank of America survey. Asked what financial planning resources and tools employees most wanted from their employer, the top choice was access to a one-on-one relationship with a financial adviser. High on the list were better online planning tools and financial seminars relevant to their life stage and personal situation.
Ulian says big employers have gotten the message. “Since the economic downturn, we have seen that the majority of employers feel a greater responsibility to help employees meet their broader financial goals,” he says, adding that many now view a financial education benefit as a competitive advantage in retaining workers.
The 401(k) as a chief retirement funding vehicle is clearly a failed experiment. It places too great an onus on the stock market to deliver timely gains and on individuals to manage their withdrawals wisely. Better lifetime income options are on the way and will be made a bigger part of employer-sponsored plans.
But we are not headed back to the days of pure traditional defined-benefit pensions. Individuals will need to make choices, and they will need help getting those choices right. But at least we’re headed the right direction.