The Lessons of Detroit for Private Sector Retirement Plans

Much has been written over the years about the transition of employees from pension plans to 401(k)s by private industry over the past decade or so, with pensions disappearing and the obligation to fund – and risk of underfunding retirement – passed to employees. There is much to be said both for and against this change, but the fact that it is underway and effectively irreversible cannot be disputed; the numbers document the former, and reality establishes the latter.

There are instances, as I suggested was the case with First Data the other day, where changes that transfer risk to employees clearly seem to be driven by the short term financial interests of investors and ownership, but generally speaking, those are outlier events when it comes to this shift in retirement funding. More often, in my view, what you have seen are viable companies that are serious about their talent pool nonetheless making shifts in this direction to ensure the long run health and future of those firms, which is at least as important to the future retirement opportunities of their employees as the continuation of pensions would have been. For a number of reasons, which I won’t discuss in detail here, companies have found such a change necessary to achieve the arguably greater good of ensuring that, in the long run, they can continue to provide good jobs at good wages, in the old formulation, having found that this socially important good is put at risk by promising to fund distant pensions.

Detroit’s bankruptcy, as has other municipal bankruptcies, demonstrates the importance of managing retirement risk for employers, and the manner in which the failure to do so in a timely manner can spell disaster down the road, for both the employer and its retired employees. Detroit’s bankruptcy is driven in large part by almost $9.2 billion (yes, that’s billion, with a B) in pension and other retirement benefits that the city cannot afford to pay – something which is putting its retirees, more than anyone else, in harm’s way. I acknowledge that comparing municipal pension problems with corporate, ERISA-governed retirement plans is a little bit of comparing apples to oranges, but the differences between the two scenarios can’t override the key similarity and take away: that ignorance by an employer of its ability long term to continue to make pension promises without regard to a future ability to pay is not bliss; that it is employees who suffer in the long run if companies don’t make changes necessary to create sustainable retirement plans rather than blindly promising pensions forevermore to employees; and that it is entirely appropriate for employers to find that elusive middle ground between contributing to retirement security for employees and the risk of taking on future obligations that the employer can’t promise it can meet, such as guaranteeing pensions.