As states look for ways to trim massive deficits, the battle over public employees' pay and benefits continues to heat up. Wisconsin, long a champion for workers' rights, has been in the news much lately as state workers and their supporters continue to protest cuts to state employees' compensation that Gov. Scott Walker says are necessary to plug a multimillion dollar hole in the state's budget.

One way some states are addressing their fiscal woes is by slowly changing public-sector employees' retirement plans to mirror those of the private sector. During the past three decades, businesses of all sizes have shifted away from traditional defined-benefit plans, which guarantee retirees a specified payment each month, to defined-contribution plans, also known as 401(k)s, to which employers contribute a portion of the workers' retirement funds.

Utah, where lawmakers voted last year to make a partial changeover to a defined-contribution plan, is the latest state to make the shift. In doing so, it follows similar actions by Alaska, Colorado, Georgia, Michigan, Ohio and several others that offer some form of a 401(k)-type plan, notes The New York Times.

Putting "Workers in a Much More Difficult Position"

Defined-contribution plans are more attractive to employers than traditional pension plans because they reduce the risk that companies (and increasingly state and local governments) will be on the hook for decades to come paying monthly pension stipends to retirees who are living ever longer lives.

"That all makes sense from the standpoint from the profit-maximizing firm or cost-minimizing government," says Ronald Filante, a Pace University finance professor. "But it certainly puts workers in a much more difficult position." That's because 401(k) plans leave it up to employees and the stock market to ensure the amount is sufficient to last through retirement.

Defined-contribution plans, whether they take the form of 401(k) plans or Individual Retirement Accounts (IRA), also are more costly and less efficient than properly administered defined-benefit plans, argues David Cay Johnston, a columnist at

In a recent column, Johnston writes:
Efficiency means that more of the money workers contribute to their pensions -- money that could have been taken as cash wages today -- ends up in the pockets of retirees, not securities dealers, trustees and others who administer and invest the money. Compared to defined benefit pension plans, 401(k) plans are vastly more expensive in investing, administration and other costs.

Individually managed accounts like 401(k)s violate a basic tenet of economics -- specialization increases economic gains. That is why the average investor makes much less than the market return, studies by Morningstar show.
Still, workers have good reasons to be engaged in the process of planning for retirement, Filante says. "Some of this transference of responsibility is a good thing." Financial planning by definition is a very personal process, and it makes a lot of sense for individuals to determine the key variables, such as risk tolerance, expected date of retirement and length of retirement, he says.

Often Ill-Equipped

One advantage 401(k) plans enjoy over pensions is that workers can take their retirement savings with them when they leave an employer. That's an increasingly important consideration for many people as job turnover becomes more common and frequent.

The problem, of course, is that removing the burden from employers simply shifts it onto the back of employees, who are often ill-equipped to deal with retirement planning. The challenge many workers face is that they're just not good investors, says Lewis Altfest, a finance professor also at Pace University. Investing requires knowledge of how markets work, and few people, for example, understand how bonds work and when is the best time to buy them.

Surveys also show that many workers with 401(k) plans haven't saved enough for retirement -- even after factoring in amounts from Social Security. "The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain [his or her] standard of living in retirement," according to research cited in a recent article in The Wall Street Journal.

The inherent volatility of investing in stocks combined with current low interest rates make it even more difficult for workers to save for retirement. Safe investment vehicles, such as certificates of deposit or money-market accounts with interest rates of about 1% to 2%, don't provide nearly the return needed to help build a retirement nest egg.

Another Job That's Becoming Your Job

For those reasons and others, both professors agree that from a worker's perspective traditional pension plans are a better deal. "All things being equal, as an employee, you probably want to have a defined-benefit plan," says Altfest, who also owns his own wealth-management firm. "But it will be more costly to the corporation and therefore more valuable to the person."

It's exactly those employer-borne costs that companies and governments are looking to ditch, which means it isn't likely that defined-benefit plans will be making a comeback anytime soon.

As with many other things that Americans have learned to become responsible for in recent years -- from pumping their own gasoline to managing their families' health care -- the winds of change mean U.S. workers will be the ones most responsible for ensuring they have enough money set aside to make it through retirement.

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Reverse mortgage loans can meet your retirement needs if you currently own a home. Like the name "Reverse mortgage" implies, instead of making payments to pay-off a mortgage a reverse mortgage makes payments to you.

June 18 2013 at 3:15 PM Report abuse rate up rate down Reply

this is what needs to be done...let the unions pay their members salaries if they choose to be loyal to the union and not to those who actually pay their salaries.

March 13 2011 at 9:42 AM Report abuse rate up rate down Reply

reply to basscat regarding union bosses who currently have done a lousey job of funding pensions. This is not true. The unions made sure pensions were funded and was the only line of defense when corporations performed hostile takeovers - many times just to get to those pension funds. Your arrogance and ignorance hurts many many people.

March 07 2011 at 11:08 PM Report abuse -1 rate up rate down Reply

I'm really happy that some of you have done well with your 401ks, as I have too. But there are many younger people and our children who are making $10 an hour that are expected to pay health insurance and set aside retirement on that amount - they can't. Substract taxes and a tank of gas and see what's left for food and shelter. Many of our young people won't consider getting married or having children because they know they can't afford to. This is not the america I grew up in or raised my family.

March 07 2011 at 11:03 PM Report abuse +3 rate up rate down Reply

Are you kidding me???? I love my 401 K! I am a Teamster Union Member and the Teamster Pension is going broke. I have done MUCH better choosing the funds available in my 401 K plan. They blow away the Teamster returns. We use only NO LOAD mutual funds so the writer is incorrect when he says they are more expensive. This entire article is tilted very PRO pension.

March 07 2011 at 7:33 PM Report abuse rate up rate down Reply

It's about time public sector employees were in the same barrel as the rest of us! We've had 401k plans for years, and we're supposed to pay the fat defined pensions of these union workers out of our pitiful funds? Like hell! The Demorats these people voted for FORCED Fannie Mae and Freddie Mac to lend to jerks that should never have had loans at all, thus CAUSING the recent market crash and DESTROYING OUR 401k's. Too bad these union mopes were'nt on 401ks then like we were!

March 07 2011 at 6:42 PM Report abuse -1 rate up rate down Reply

There is NO Free Lunch................Ever !

Finally, reality comes to the Public Sector !

It is still way too late, brace for a big Inflation to balance the debt to equity
of Government and Households !

March 07 2011 at 5:43 PM Report abuse rate up rate down Reply

Fortune 500 companies over the past twenty years have gone to 401 K's. American's
need to take ownership of their retirement. Interest rates will not stay so low much longer and income interest will rise. Anyway you own the account! Not the union bosses who currently have done a lousey job of funding pensions!

March 07 2011 at 4:31 PM Report abuse +1 rate up rate down Reply
2 replies to basscat58's comment

I pay for all my retirement benefits. Why should my tax dollars pay for their

March 07 2011 at 3:20 PM Report abuse +4 rate up rate down Reply
1 reply to crtranspor's comment

TO ALL YOU SENIOR CITIZENS OUT THERE WHO HAVE GREEDY CHILDREN (LIKE I DO) WHO ARE ALWAYS CONCERNED ABOUT MY HEALTH (well dad, you take care of yourself now, sorry we can't make it over to see you this month, but you stay healthy now, and say Hi to mom) THERE IS SOME FUN YOU CAN HAVE - AND ENJOY YOURSELF AT THE SAME TIME.

My kids are basically good, and they are well educated, I know I paid for it for years, working 2 jobs at times. But with retirement, and a prostate problem, I was cash poor, but house rich - our house was built in a nice suburb, and despite going down some in value, it is still worth 8 times of what I paid for it. So, when my adult kids started hinting that I might want to pay for my grandchildren's college education (me pay for their kids) instead of going on a vacation (oh dad, thats a lot of walking, and you know mom gets tired these days easily) In fact, My kids are very concerned about any big purchases I make.

So, my wife and I went and got some money, a nice check each month that let us take that trip, and even let us put a limited amount in a college saving account, for my grandkids, that my kids have to match in order for me to give. Our secret source of money is a reverse morgage on our house with our credit union, and I sold off an old coin collection I never could get my kids, or grandkids interested in- so it is sold. We will get the money over several years, and once we are passed away, our children will discover our secret - they will inherit our home, but they will only get part of it, the credit union owns the other part.

But our kids who really are doing OK on their own, will have less to fight over, and maybe in a way, that is a favor to them. It would just mean a larger car in their driveway, or maybe a bigger home in their fancy school district.

Maybe surprise your kids? It is an idea if you have a big house, and not enough money to get by. We even had trouble paying the taxes, so they could inherit it- and that just is not how it should be.

Sign me _sneeky grandpa in California

March 07 2011 at 12:55 PM Report abuse +3 rate up rate down Reply
1 reply to Ken's comment

If you really want to have some fun turn the tables, tell them how hard up against it you are and ask them for some financial help.

March 07 2011 at 4:27 PM Report abuse +1 rate up rate down Reply