The Danger of the DIY Retirement Savings Plan

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

The debate around our cover story and middle-class money continues. Damon Jones, a professor the at University of Chicago Harris School of Public Policy, adds that saving for retirement is a different process than in generations past:

One of the most important financial decisions we face is saving for retirement. Over the last three decades, there has been a massive shift in how private-sector workers save for the future. Today, more workers than ever before are relying on retirement plans that depend on their personal investment choices and stock-market performance, as opposed to plans that have a guaranteed pay out built in.

In 1980, 62 percent of workers with retirement plans had only a defined benefit plan. These are the traditional pensions of our grandparents’ era: they promise a stream of income at retirement, based on a worker’s earnings and years of service with an employer. Meanwhile, only 7 percent of workers relied solely on a defined contribution plan. A defined contribution plan, such as a 401(k), pays out based on how much the worker and employer each contribute, as well as how the investment fares on the stock market. By 2011, these numbers had essentially reversed: 69 percent of workers enrolled in a defined contribution plan, and only 7 percent in a defined benefit plan.

While both plans involve risk, defined contribution plans arguably shift more risk onto employees. Defined benefit plans are insured by the federal government and are typically paid out in an annuity, guaranteeing a fixed payment over the rest of one’s life. In contrast, defined contribution plans are more susceptible to the throes of financial market swings and are more easily cashed out in a lump sum at retirement, leaving workers exposed to the risk of outliving their wealth. And while defined contribution plans provide personal control, this presents more opportunities for investors to miss out—many plans require active enrollment and active transferring of funds when changing employers. While retirement plans do not tell the whole story, they play a role in determining American’s financial security.

Note: Defined benefit and defined contribution participation rates from the Employment Benefit Research Institutes tabulations of US Department of Labor statistics.