Are pensions set for a big retirement return in 2024?

Employers are increasingly expanding the options available to help employees save for retirement. But what are they doing to help employees spend those funds responsibly once they leave the workplace?  

In 2023, just 19% of employees participated in a pension plan, according to data from the Bureau of Labor Statistics. Pensions, also known as defined benefit plans, provide a set monthly payment for life, an increasingly appealing benefit as employees approach retirement with a lack of education around how to spend down their savings. 

"Over the last 20 years, if not more, we've been getting people to save and invest, with mixed results," says Mindy Zatto, founding principal at Strategic Benefits Advisors. "Now that we have all these people retiring, the question now is, how are they going to figure out how to spend it? And we've essentially given all of that responsibility to individuals."

Read more: Could a return to pensions solve the impending retirement crisis? 

Most employees are not prepared for this responsibility: 40% of individuals are projected to run out of money in retirement, according to a 2019 study by the Employee Benefit Research Institute. Meanwhile, the average employee has a 401(k) balance of $141,542, according to Vanguard. While not a paltry sum, it's estimated retirees will spend $52,141 per year after leaving the workforce, making a speedy spend-down all the more likely without support. 

That's why some employers are acknowledging the necessity of a lifetime income option: IBM announced it would end their 5% 401(k) match in 2024 (though the option will still exist), and direct 5% of employees' incomes into a new "Retirement Benefit Account" instead. The account yields a 6% guaranteed return until 2027, and will then provide a 4.2% return-per-year through 2034. 

Ikea U.S. is also increasing their support of their lifetime income option with a $1,182 contribution to each eligible employee's fund through their Tack! employee loyalty program. With so many large employers getting on board, it could be a sign that the retirement industry is set for yet another major shift. 

"Not everybody has the same ability to figure out long-term finances, or even the discipline or the means, and we're asking them to figure out how to make it last for 20 or 30 or 40 years," Zatto says. "Plan sponsors are starting to see that if employees can't retire because they don't know how long their money will last, we've got an employment issue." 

Read more: Mindy Zatto is helping employers build the right retirement plan 

At Ikea, their Tack! retirement benefit program helps with their recruiting and retention efforts, too. Making an additional contribution to these funds is a way to acknowledge employees' efforts throughout the year, says Neena Potenza, chief people officer at Ikea U.S.  

"To support retirement and financial well-being, employers should genuinely care about their employees' financial health," Potenza says. "The Ikea Tack! program shows appreciation to employees during their active years and into retirement, reflecting the Ikea value of togetherness. This expression of gratitude for the loyalty and contributions of all employees, regardless of their position, is a way of saying thank you." 

Exploring lifetime income options beyond pensions

Zatto says some plan sponsors have looked to provide a long-term spending plan through their 401(k) option — offering a $1,000 pay-out per month, for example. While that doesn't solve the need for lifetime income, it's still a promising start for what could change in the industry over time. 

"We're starting to see plan sponsors dipping their toe in the water about trying to help employees figure out how to make their income last. Installments is a basic tool to create periodic and scheduled withdrawals of money," she says. "There are any number of options out there that are really developing and coming into the market and becoming more mainstream or common." 

But contributions won't solve this crisis alone — Zatto says plan sponsors will also need to play a role in educating employers and employees alike on the decumulation phase, an area the business has been relatively slow to respond to, despite increasing demand. 

"There's a lot to work out between this: The financials of it, the options and the employee education. Plan sponsors just have not jumped on that," Zatto says. "They're just starting to realize that they're probably going to have to play a role in this next phase, as they learned they had to play a role in the accumulation phase."  

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Just as it took decades for employers to embrace 401(k)s and adapt their education and communication to this style of savings, it will take a similar effort to return to pensions, Zatto predicts. Yet as employees continue to struggle with their savings both before and during retirement, it's a necessary effort.  

"There's definitely a bias against pension plans, because there is a thought that they're expensive, but it is a better answer in the end," Zatto says. "I'm not saying to do away with defined contribution plans, but we can't ask everybody to be an expert in these kinds of complicated long-term situations or put all the onus on each individual employee. There's a better path."