Pensions Key to Labor Department’s Retirement Savings Campaign

Public-sector unions are emerging as a key player in the U.S. Labor Department’s effort to reshape 401(k)s in the fading image of traditional pensions.

Labor Secretary Marty Walsh and his newly appointed retirement security adviser Kathleen Kennedy Townsend visited New York City’s top teacher union Monday to kick off a series of discussions on the state of U.S. retirement security.

Often considered a relic of the U.S. retirement benefits industry, public pensions are serving as a gold standard for adequate workplace retirement coverage under a Democratic administration. Newer 401(k)-style plans are filling the void that private-sector pensions are leaving behind, but they fail to offer the same promise of lifetime income, portability, and ease that pensions did, Walsh said during the event at the United Federation of Teachers’ Manhattan headquarters.

“Planning your retirement should be simple, it should be easy, and it should be secure,” he said. “No one should have to worry about outliving their money and living in poverty for the rest of their lives.”

Public-sector workers make up the largest remaining faction of workers covered by defined-benefit pensions. Only about 16% of private-sector workers have access to a workplace pension plan, compared to about 86% in the public sector, according to the U.S. Bureau of Labor Statistics.

Pensions guarantee workers a predetermined “defined” benefit at retirement. As long as they stick with their employer for a number of years, the company they work for will continue paying out that set monthly benefit until they or their beneficiaries die. Defined-contribution plans such as 401(k)s shift the responsibility of saving squarely on the backs of workers. The amount of money they contribute to the plan and grow in the market throughout their career is the amount they’ll have when they retire.

Defined Benefit Advantages

Private-sector employers want to shed the costly responsibility of maintaining pensions, especially in the wake of historic economic downturns that left businesses subsidizing under-performing investments. Conversely, public pensions have remained somewhat shielded from that trend by taxpayer stipends and political pressure to keep benefits untouched.

“As labor, we need to fight for that for everyone,” said American Federation of Teachers President Randi Weingarten to a round of applause and whoops from the union-heavy audience. “Yes, of course, we fight for it for our members, but, just like health care, every American needs to have retirement security.”

The median defined-contribution balance was $22,000, according to a 2018 analysis of Vanguard Group Inc. plans.

“You tell me how a retiree lives on $22,000 in the United States of America,” Weingarten emphasized.

Kennedy Townsend, a former Maryland lieutenant governor who has dedicated much of her career to retirement security, is using her new position with the Labor Department to put retirement savings on the social-change agenda. She told Bloomberg Law last week that she wants retirement policy to be a part of the same discussion surrounding federal minimum wage hikes and mandatory paid leave.

Union-backed public pensions have a strong, unified voice, she said after Monday’s kickoff event. As she works with department leaders to pull regulatory controls that can help ease portability and lifetime income options in 401(k)s, she said she’s using pensions as a model.

“There are three big advantages of a defined benefit plan: You get it at work, it stays with you wherever you go, and you have lifetime income,” she said. “The goals I’ve set for 401(k)s are really the best parts of the defined-benefit plan. That’s going to be a challenge, but what defined-benefits set out is what it feels like when it feels right.”

Savings Left Behind

Workers who switch jobs leave behind their retirement benefits at an alarming rate, Kennedy Townsend said. More than $1 for every $100 in the defined-contribution space leaks out every year because participants lose track of old savings accounts or take early distributions, according to the Center for Retirement Research at Boston College.

Removing money from an account early eliminates the possibility of compounded growth, making it even harder for a retiree to make 401(k) savings last later in life.

Kennedy Townsend called on the DOL’s Employee Benefits Security Administration to simplify the process workers have to undertake to roll over their 401(k) assets and force all employers who offer a workplace plan to accept their new employees’ old accounts. EBSA Acting Assistant Secretary Ali Khawar, who also attended Monday’s event, said he heard those calls loud and clear.

His agency is “absolutely thinking about all of these issues,” he said. Future conversations will unearth more work his agency can explore to ensure workers are connected with the benefits they’re due.