Last September, the United Auto Workers (UAW), the union representing nearly 150,000 employees at factories run by GM, Ford, and Stellantis (the “Big Three” automakers), initiated a historic strike.^[1] Chief among the unions’ demands were calls for a 40-percent wage increase to mirror the windfalls received by executives in recent years, cost-of-living adjustments to keep up with inflation, and the end of two-tier wage arrangements.^[2] While the eventually ratified contract did in fact raise base wages, resurrect cost-of-living adjustments, and eliminate the tiered wage system, one of the unions’ lesser-publicized resolutions did not make it into the new four-year contract.^[3] This resolution called for a return to the defined benefit pension plans that all UAW-represented workers received prior to the signing of a concession-heavy, management-friendly contract in 2007.^[4]

As defined by the U.S. Department of Labor, a defined benefit (“DB”) plan is one that guarantees a specified monthly amount at retirement, sometimes in the form of a precise dollar amount set in advance, but more frequently calculated by formulas that consider salary while working and time served.^[5] A DB plan is the technical term for what most colloquially call a pension, and refers to “a retirement arrangement in which your employer promises you a regular payment from the day you retire, for as long as you live.”^[6] The other type of retirement plan covered by the Employee Retirement Income Security Act (ERISA) is known as a defined contribution (“DC”) plan.^[7] DC plans (401(k), 401(b), and employee stock ownership plans, for example) do not guarantee precise monthly amounts set out in advance or calculated by formula, but instead are arrangements wherein the employee or the employer (or both) contribute towards one employee’s retirement account, often at a rate set at a percentage of the employee’s annual earnings.^[8] DC plans differ from DB plans in that the employee, instead of the employer, makes saving and investment decisions.^[9]

Over the past five decades, DC pension plans have surged in popularity, especially in the private sector. In 1975 there were about 27.2 million active participants in private-sector DB plans as compared to 11.2 million active participants in DC plans.^[10] By 2019, private-sector participants in DB plans numbered 12.6 million while a staggering 85.5 million private-sector employees had DC plans.^[11] This remarkable turnabout has been attributed to a number of factors, including the relative administrative ease of offering DC plans (DB plans often call for complicated actuarial projections).^[12] However, the most obvious driver of this shift is an attempt by employers to reduce their own financial outlays and investment exposure.^[13] While DB plans are generally funded entirely by the employer, a markedly smaller amount goes towards DC plans, and much of the decision-making and investment risk is offloaded to workers.^[14] It is easy to see the allure of these plans for profit-maximizing employers, but the shift to DC plans has spurred increasing financial precarity for American workers.

Under 401(k) plans and similar DC instruments, workers could theoretically build a healthy nest egg for retirement but, for several reasons, this is seldom the case. According to survey data, on average only 75% of those who are eligible to participate in DC plans do so, and less than 10% of those participating contribute the maximum amount allowed by their employer.^[15] Further, over 50% fail to properly diversify investments, and they seldom rebalance their portfolios as they age or as markets fluctuate.^[16] Finally, some large companies like Amazon impose three-year vesting requirements before they will even start matching employee contributions to DC plans, an onerous requirement given the low pay and high turnover often seen in warehousing jobs.^[17] By contrast, workers automatically enrolled in and continuously covered by a DB plan, including those with average incomes, “will by the operation of the plan accumulate an entitlement–backed by federal law and a federal insurance guarantee–to an adequate level of replacement income at retirement.”^[18] In addition to making many workers worse off financially, the shift toward DC plans is forcing aging Americans to stay in the workforce longer.

According to the Pew Research Center, workers aged 75 and older are the fastest-growing age group in the workforce, with more than a fourfold increase since 1964.^[19] The increasing ubiquity of DC plans is commonly cited as a driver of this shift.^[20] Under DB plans, pension wealth will typically grow until the employee hits normal retirement age and then begin to decline; DC plans, on the other hand, have no retirement incentives tied to age.^[21] According to some estimates, this keeps DC plan employees in the workforce for an extra two years, while others have speculated that the precipitous drop in the share of private-sector workers with DB plans from 1980-2014 may have led to an approximately 6-month increase in the average retirement age.^[22] Whatever the exact numbers, any set of conditions that results in retirement-age workers remaining in or returning to the workforce should alarm policymakers and spur change.

Though the UAW was ultimately unable to force the Big Three automakers to restore pre-2007 DB plans, the union set a laudatory example that will hopefully inspire other unions to do the same in future contract disputes. In addition to the abundance of evidence showing that DC plans are often a losing proposition for workers, DB plans simply make good business sense for employers. According to the online jobs platform Glassdoor, employers with DB plans consistently garner higher employee satisfaction ratings, which is often a boon to recruitment and retention efforts.^[23] And, in contrast to the widely-held belief that DB plans are always a financial risk for employers, JPMorgan analysts have recently argued that offering DB plans may actually be a net positive for corporate finance, noting that these plans provide “economic, strategic and social benefits to both employers and plan participants.”^[24]

Some large employers, like IBM, have begun to take notice and are offering hybrid plans that balance a 401(k) plan with a DB instrument.^[25] This is undeniably a good first step, but a full return to comprehensive DB plans, as exemplified by the UAW’s resolution, should be the aim going forward. As the data shows, employees, employers, and the economy writ large all stand to benefit. All workers have a right to a dignified retirement, and they stand the best chance of reaching this goal when backed by a DB retirement plan.

 

 

[1] Neal E. Boudette, U.A.W. Goes on Strike Against Detroit’s Big 3 Automakers: Workers walked off the job at 3 initial sites in a targeted labor action against Ford, General Motors and Stellantis—the first ever of all three at once, The N.Y. Times (Sept. 14, 2023), https://www.nytimes.com/2023/09/14/business/uaw-strike-plan.html.

[2] Id.

[3] Kalea Hall & Jordyn Grzelewski, What’s the deal? UAW details gains of new four-year contract with GM, The Detroit News (Nov. 4, 2023), https://www.detroitnews.com/story/business/autos/general-motors/2023/11/04/uaw-details-gains-of-new-four-year-deal-with-gm/71453815007/.

[4] Defined Benefit Pensions: UAWD Priority Resolution for the 2023 Bargaining Convention, Unite All Workers for Democracy, https://uawd.org/pensions/ (last visited Jan. 14, 2023).

[5] Types of Retirement Plans, U.S. Dep’t. of Lab., https://www.dol.gov/general/topic/retirement/typesofplans (last visited Jan. 14, 2023).

[6] What is a Pension?, Pension Benefit Guar. Corp., https://www.pbgc.gov/about/who-we-are/retirement-matters/post/2013/04/17/What-is-a-Pension (last visited Jan. 21, 2023).

[7] Types of Retirement Plans, supra note 6.

[8] Id.

[9] What is a Pension?, supra note 7.

[10] Elizabeth A. Myers & John J. Topoleski, A Visual Depiction of the Shift from Defined Benefit (DB) to Defined Contribution (DC) Pension Plans in the Private Sector, Cong. Rsch. Serv. (Dec. 21, 2007), https://crsreports.congress.gov/product/pdf/IF/IF12007.

[11] Id.

[12] Id.    

[13] Id.

[14] Id.

[15] By not contributing the maximum amount allowed by their employer, an employee leaves potential retirement savings on the table. Alicia H. Munnell & Annika Sundén, Coming Up Short: The Challenge of 401(k) Plans 173-74 (2004).

[16] Id.

[17] Samantha J. Prince, Megacompany Employee Churn Meets 401(k) Vesting Schedules: A Sabotage on Workers’ Retirement Wealth, 41 Yale L. & Pol. Rev. 1, 4 (2022).

[18] Samuel Estreicher & Laurence Gold, The Shift from Defined Benefit Plans to Defined Contribution Plans, 11 Lewis & Clark L. Rev. 331, 333 (2007).

[19] Richard Fry & Dana Braga, Older Workers Are Growing in Number and Earning Higher Wages, Pew Rsch. Ctr. (Dec. 14, 2023), https://www.pewresearch.org/social-trends/wp-content/uploads/sites/3/2023/12/ST_2023.12.14_Older-Workers_Report.pdf.

[20] Id.

[21] Id.

[22] National Academies of Sciences, Engineering and Medicine, Future Directions for the Demography of Aging: Proceedings of a Workshop 238 (Mark D. Hayward & Malay K. Majmundar, Eds., 2018).

[23] Martha C. White, The Pension: That Rare Retirement Benefit Gets A Fresh Look, The N.Y. Times (Nov. 24, 2023), https://www.nytimes.com/2023/11/24/business/pension-retirement.html.

[24] Dan Doonan, UAW Couldn’t Restore Ford Pensions, But There’s A Good Business Case for a Pension Renaissance, Forbes (Oct. 27, 2023), https://www.forbes.com/sites/dandoonan/2023/10/27/uaw-couldnt-restore-ford-pensions-but-theres-a-good-business-case-for-a-pension-renaissance/?sh=55a0f8a84373.

[25] White, supra note 23.