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