Can today's HR dilemmas be solved by a device from yesteryear?

If you’re in corporate employee benefits or human resources, you are likely facing a set of challenges very much unlike any you’ve dealt with before. Yes, I know, not every company is hearing the same things. But, when I read data from surveys, a few dilemmas seem to be coming to the top of nearly every one of them.

As recently as 10 years ago, workforces, particularly those heavily weighted toward younger workers, had a new set of needs. They cried for work-life balance and the ability to have social activities such as games in the office among other seemingly newfangled ideas.

Well, 10 years have passed and a lot has happened in the world. In 2021, many companies cannot find enough workers and even when they do, they’re often not able to compete for those employees that they really want to hire. The rewards program of 10 years ago isn’t working anymore. Trailblazing Human Resource departments are building the workplace of the future. 

In doing so, they face a number of challenges. Three that seem to be high on every organization’s list are these:

1. Recruiting and retention
2. Diversity, Equity, and Inclusion (DEI)
3. Guaranteed lifetime income for employees who fear outliving their savings

Perhaps the single employee benefit that has seen the greatest decline over the last few decades is the employer-provided pension. But, if employers want a device that will help them to face those challenges, that pension might be the best device of all. Companies that still have those plans in place often realize that, but they might not understand quite how powerful they can be.

Before you get the idea that I am suggesting that every company start up a 1980s style pension plan, that’s not what I have in mind at all. While those pensions are right for some organizations, plan designs have evolved over the years and for some companies, the newer designs could work better.

This isn’t about design, though; this is about facing and overcoming today’s challenges. And, yes, I am telling you that a good piece of that solution might lie in a defined benefit pension plan. Let’s consider why.

The current trend in retirement plans is to offer a (often safe harbor) 401(k) plan and that’s it. That doesn’t address any of those key challenges. Even with the lifetime income solutions being trumpeted in the industry, all are being offered by asset management houses that are in business to make money. So, the lifetime income that they are offering is not being done on a fair “actuarially equivalent” basis. It’s being done to ensure their profits. And, in a zero sum game, if the asset manager makes money, it comes from the employee’s account. 

Providing financial stability is a bit trickier argument because your view might depend on how you read the data. Suppose you see the headline: “60% of American Workers on Track to Retire,” is that good news or bad news? 

Proponents of the 401(k)-only regime say that it’s great. When I read it, and frankly the number is usually less than 60%, I think it’s horrible. That means that 40% of American workers are not on track to retire. That’s really bad if you ask me.

And, this is where the DE&I initiatives come in. Who are the people who are not on track to retire? To a large extent, they are the people that DE&I campaigns are trying to help. They are people of color, they are women, they are other minorities. They are lower-paid people who are forced to stop their 401(k) deferrals when they have a personal financial blip whereas higher-paid people simply reduce their discretionary spending. 

The same problem just doesn’t exist in a company that provides a defined benefit plan for its employees. When a primary caregiver reduces their hours (and therefore pay) from 40 hours to 30 hours, they likely cease 401(k) deferrals, but their DB plan continues. When a lower-paid worker who is far more likely to be an ethnic or racial minority than is a high-paid worker has a sudden unexpected expense, they likely cease 401(k) deferrals, but their DB plan continues. When the stock market has a major correction as it does from time to time, even fewer of those lower-paid people will be on track to retire, but those with a DB plan will be far less injured.

Companies that have committed to DB plans know all this. They know that employees who have gotten used to knowing that lifetime income is coming won’t often jump ship. They know that when they are interviewing candidates and those candidates ask about the 401(k) plan that they can say that not only do we have a 401(k) plan, but we also have a plan that we pay for that provides you with lifetime income. 

Words matter. Words work. In 2021, the words lifetime income work. Telling candidates that the lifetime income benefit will continue to grow even when they can’t afford to save themselves because their COVID-related expenses have gotten in the way works. Telling a candidate that grew up in an environment in which nobody was on track to retire that they can have a lifetime income benefit works. Telling a young person that would like to raise a family that you provide a company-paid lifetime income benefit works.

Companies that already do this know it and they trumpet it. Defined benefit plans are a thing of the past for a problem of the past. You know what – if companies want to attract and retain the workers they want in 2021 and beyond, they should probably be a thing of the future as well.

John Lowell is an Atlanta-based actuary and partner with October Three Consulting LLC. He has more than 35 years of experience consulting on corporate retirement plans ranging in size from just a few participants to hundreds of thousands. John was president of the Conference of Consulting Actuaries in 2018. He can be reached at jlowell@octoberthree.com