Retirees Getting More Income From Retirement Plans


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That hard-earned money you and millions more private-sector workers sock away in retirement plans pays off.

Those nest eggs, in IRAs, 401(k) and traditional pension plans, are providing more retirement income than that category of retirement plans did in 1974, according to a new study from the Investment Company Institute.

That's the year ERISA (the Employee Retirement Security Act) was created, opening the door to the creation of IRAs and, a few years later, of 401(k) plans.

The income gain suggests IRAs and 401(k) plans have more than made up for the declining influence of traditional pensions. The conventional wisdom is that the mid-1970s were part of a bygone era when traditional pensions alone gave retirees ample, steady incomes.

But that supposed golden age is largely a myth, says Peter Brady, senior economist and coauthor of the report from the ICI, which is a mutual fund industry group. Fund groups have thrived on the growth of IRAs and 401(k)s.

Yes, more companies offered traditional pension plans in past decades. In 1985, for instance, 89% of Fortune 100 companies offered one, according to professional services firm Towers Watson. By October 2012 that had plunged to 11%.

But workers did not necessarily collect much in benefits from them. "Private sector workers change jobs a lot, and they might not vest (in their traditional pension plans) or they might not be entitled to a large benefit because they leave a work place too soon," Brady said.

Tough Vesting Rules

A worker who is 100% vested is entitled to all of his accrued benefits. But in 1974 many plans vested benefits only after a worker had been on the job for at least 20 years. And many only vested benefits if you stuck around until retirement, according to the ICI.

As a result, in 1975 only 21% of private-sector retirees got income from a private-sector retirement plan -- mainly traditional pension and early defined contribution (DC)plans. And that yearly income averaged $4,800 in 2012 dollars.

By 2012 32% of retirees got income from a traditional pension, defined contribution plan such as a 401(k) or an IRA. And that yearly income averaged $6,300.

As a portion of retirement income, that privately sourced $6,300 accounted for 14% of yearly income, up from 8% in 1975. The rest came from Social Security, assets in taxable accounts, government pensions and other sources.

The overall boost is due in part to faster vesting rules required by ERISA. The tax reform act of 1986 sets a five-year maximum for plans that vest all at once and seven years for gradual vesting.

"And the increase in (private-sector retirement) income is probably understated because government survey data may not include all of the payments from DC plans and IRAs," Brady said.

What's the key lesson for workers? Having a retirement plan boosts your retirement income. Boosting contributions to plans you control -- 401(k)s and IRAs -- likely translates into more income.

"Contributing to your plan and contributing enough over enough years gives you assets you control and more income," Brady said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds

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