Many employees will enter retirement with a much smaller income than they expect, the Economist reports. By 2014, the amount of money saved in direct-contribution retirement plans—ie 401Ks—will outpace than the amount saved in old-fashioned direct-benefit plans. But workers set contributions to their DC schemes at lower levels than might have been set aside in DC schemes. Add poor investment decisions, and many pensioners could end up with half the retirement income they would’ve drawn under DB.
By moving away from a scheme that requires employers to guarantee set pension payouts, businesses have shifted the investment risk of retirement savings from themselves to their employees. DB is problematic because it turns firms into “quasi-hedge funds,” but companies also must educate their employees on their new responsibilities.