Pension plans? Retirement survey shows changing retirement landscape

Many workers today have the opportunity to participate in an employer-sponsored 401(k) retirement plan. And employers continue to leverage these types of retirement benefits as major recruitment tools.

However, it might surprise you to know that among those who’ve already entered retirement, traditional defined benefit plans (pensions) represent about 40% of their income. In fact, Social Security and traditional defined benefit pensions remain the cornerstone of the typical retiree’s income.¹ 

Do those numbers contradict mainstream messaging that pensions are on the decline? Not necessarily. Nearly two-thirds of retirees received pension income a decade ago compared to only half in 2023.¹ 

According to a LIMRA study, retirement income from defined contribution plans and IRAs are expected to become as common as pension payments over the next 10 years. That appears to be the tipping point when a greater number of workers who spent most or all of their careers contributing to employer-sponsored plans will enter retirement.¹

The survey suggests that 8 in 10 workers expect a defined contribution plan (401(k)) to be a source of income when they retire, and traditional pensions are expected to be a source for less than two fifths.¹

But does that mean employers shouldn’t consider pension plans as part of their business strategy? Some retirement planners suggest that pension plans may make a comeback, especially as labor shortages continue to create challenges for organizations.

Proactively address potential employee risks

With fewer pensions, employees may need to rely more heavily on another form of guaranteed retirement income: Social Security. While these benefits can cover some expenses in retirement, most realize that Social Security likely won’t provide the standard of living they’re accustomed to. 

The risk of running out of money is a very real fear for some individuals. With fewer guaranteed income streams, the guidance from plan sponsors and financial professionals may be more important than ever. Fortunately, pension plans may be more accessible (and affordable) than previously thought, and there are numerous options available to help employees make the most out of their retirement planning.

Choosing between defined benefit and TPA cash balance or defined contribution plans doesn’t need to be all or nothing. For example, a defined benefit plan could be added to an employer-sponsored 401(k) defined contribution plan. An option may help employers offer a desirable retirement benefit that appeals to current and prospective employees. 

There might also be tax advantages for business owners because they may have the option to make larger tax-deductible contributions to an employee’s defined benefit plan than they can to their 401(k). 

According to the Internal Revenue Service (IRS), a participant’s annual benefit for a defined benefit plan cannot exceed the lesser of:

• 100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or
• $265,000 for 2023² 

Contrast those figures with defined contribution plans where employers can’t exceed $69,000 for an eligible employee’s annual compensation ($76,500 including catch-up contributions).³

Employers need to explore options

Employers who may have once believed they could never offer pension plans for their employees may not be aware of all the options available to them. Armed with the right knowledge, business leaders may help fuel a resurgence of pension plans that benefit both the employer and employees in several ways.

Business owners can’t go at it alone, however. It’s critical to work with an experienced defined benefit plan leader who understands the ins and outs of leveraging proper plan designs, actuarial requirements and administrative support.

Contact Cuna Mutual Group to talk through whether adding a defined benefit plan option to your retirement offering can help you reach your business goals and help employees feel more confident about their retirement outlook. 

Sources

¹LIMRA, 2023 Retirement Investors, 2023

²Internal Revenue Service, Retirement Topics – Defined Benefit Plan Benefit Limits, 2023, August 29

³Internal Revenue Service, Retirement Topic – 401(k) and Profit-Sharing Plan Contribution Limits, 2023, December 22

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