Pensions are chronically underfunded. Defined-contribution plans like 401(k)s are needlessly complicated and expensive, and many Americans can’t afford to put away even a small portion of their paychecks. It is time to get serious about helping workers achieve a secure retirement.
General Electric Co. last week delivered the latest blow to workers’ retirement hopes. It froze pension benefits for roughly 20,000 workers as part of an effort to shrink its $22.4 billion pension deficit, the largest in corporate America.
GE had little choice, but its huge pension shortfall is entirely its own creation. GE made some classic blunders with its pension portfolio over the years, such as selling beaten-down risky assets around the 2008 financial crisis. But its biggest mistake is endemic to corporate pensions in general. A key assumption in every pension plan is the expected return from its portfolio — the higher the expected return, the less the company must contribute to meet future obligations. Not surprisingly, executives are cockeyed optimists about the performance of the portfolios.
Given the history of those managing the GE and other large pensions, there is little indication corporate executives are any better at managing money than their employees. Many companies have all but conceded as much by pivoting from traditional pensions to 401(k)s and other retirement plans that hand over responsibility for saving and investing to workers.
But workers are no more likely to succeed. Many earn too little to set aside money in retirement plans, if such plans are even available to them. And those who do participate struggle to navigate the plans’ typical hodgepodge of expensive actively managed mutual funds. Retirement plans should do everything possible to optimize workers’ retirement, not exploit it.
To that end, companies and policymakers can make some simple changes. For one, companies should contribute directly to workers’ retirement accounts. Also, policymakers should separate retirement accounts from employment, as with individual retirement accounts. It would reduce employers’ liability and administrative burden and allow workers to take advantage of the movement toward free commissions and low-cost indexing and financial advice sweeping the money management industry.
For now, the moral of GE’s story is that companies and policymakers still have their heads in the sand when it comes to retirement saving.
Kaissar is a columnist for Bloomberg.