Labor Day is a time when we celebrate the achievements of the American worker. It also is an opportunity to recognize the important role that the labor movement has played in contributing to the current and future economic security of workers and their families, through their advocacy of workplace health and pension benefits, and to express our gratitude to employers who share this commitment to providing good benefits for their workers.
However, this Labor Day, far too many American workers face an unparalleled degree of financial uncertainty. Many are facing significant losses in their retirement savings that may take years to regain. This is truly tragic, since after they spend their careers working, Americans deserve a secure retirement.
Our retirement system has been described as a three-legged stool, comprised of Social Security, employer-based retirement plans, and personal savings. All three legs remain essential elements of ensuring an adequate retirement. For many workers, Social Security benefits remain the only form of retirement savings. However, it is important to supplement Social Security with employer-based retirement income and private savings.
When the Employee Retirement Income Security Act (ERISA) was passed, most workers with access to employer-sponsored retirement plans were in traditional pension plans, called defined benefit plans. Over time, however, the market has shifted, and defined contribution plans, such as 401(k) plans, have become increasingly popular. These plans allow employees to save pretax dollars and give employees more control over investment decisions. The benefits are based on the employee’s account balance at retirement. A key drawback of these plans is that the employee bears significantly more risk – risk that you haven’t saved enough money to carry you through retirement and that you will outlive your assets; risk that you made poor investment decisions and your assets haven’t grown very much; or, the risk that a market meltdown will decimate your 401(k) account balance as you are nearing retirement.
Those who reach retirement age with an adequate retirement account balance in their 401(k) plans face another difficult decision – what should they do with their retirement distribution when they get it? 401(k) plans usually distribute pension benefits all at once in a lump sum and an increasing number of other retirement plans give employees a choice of taking their retirement as a lump sum – and many employees choose this distribution option. Cashing out your account in this fashion means that you are solely responsible for managing your assets so they last for the rest of your life.
This very challenging task is one of the reasons that the Department of Labor recently began an initiative, along with the Department of the Treasury, to examine whether there is a need to encourage employers to offer workers the ability to draw some or all of their pension as a lifetime income stream rather than a lump sum and to encourage workers, when given that choice, to select a lifetime income stream if that is appropriate for them. Our goal is to start a national dialogue on these critically important issues because Secretary Solis’ goal of achieving good jobs for everyone includes the idea that when your working days come to an end, you should be able to enjoy a secure retirement based in part on the pension you earned while you were working.
So on this Labor Day we need to recommit ourselves not only to assuring good jobs for all American workers but that we must also be sure that after our working days end, we will have a secure retirement. Together, I am confident that we will be able to achieve this goal for all American workers and their families.
Phyllis Borzi is the Assistant Secretary for the Employee Benefits Security Administration (EBSA)