Frequent internet users are likely familiar with the demotivational posters at despair.com, such as this one on retirement. If a recent study by a partner at the Mercer consulting firm is to be believed, then they should perhaps add another one to the list: switching from pensions to 401(k)s.
As reported here, the researcher compared two companies: one that replaced its pension with a 401(k) in the late 90’s and one that did not. In the company that replaced the pension, the researcher found dissatisfaction by younger employees as older employees remained employed and thus prevented the younger employees from advancing. As the article notes:
[The replacement of a pension with a 401(k)] affected job mobility “velocity,” Nalbantian found, and the percentage of people moving into new positions, whether vertically or horizontally, stalled at 11 percent. This, in turn, accelerated the exit of more talented people who saw advancement potential evaporating, the research found.
On the other hand, at the firm with a pension, velocity remained at about 18 percent.
This is an interesting data point, but the study has some limitations. There could be a great many other factors, such as organizational culture, changes in leadership, the availability or lack of availability of other benefits (such as retiree health). The bottom line: by comparing only two companies, there are a great many variables that are not controlled.
However, the study does underscore an important consideration for employers making the switch: consider what effect it could have and try to adjust accordingly. Offering more generous 401(k) benefits, or enhancing other benefit offerings, may be important in ensuring a smooth transition from the DB to the DC world.
Additionally, now many providers are offering products that create lifetime income opportunities inside DC plans. The IRS recently issued helpful guidance in this regard with its qualified longevity annuity contract regulations. These options were not available until recently, and may help make the transition less difficult for employees as well.