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The New Reality for Your Retirement

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Generations of workers have largely relied on their employers to take care of their financial needs after they retire. But in recent years, companies have stepped down from their responsibility for ensuring that you have a comfortable retirement -- and now more than ever, it's up to you to make sure you build the financial resources you need to cover all of your living expenses after you stop working.

A brief history of worker retirement
Decades ago, workers counted on three sources of retirement income. From the government, Social Security ensured a base level of subsistence income. Monthly payments from employer pensions, which were largely based on a worker's lifetime salary history, helped bring retirement income toward levels that workers became accustomed to during their careers. And finally, whatever retirement savings workers accumulated on their own provided a supplemental source of funds for unexpected problems or one-time splurges.

Over the years, though, the challenges involved in meeting pension obligations have pushed employers to make changes to the benefits they offer their workers. Employers have largely moved away from defined benefit plans, in which they bear the risk of coming up with investment returns sufficient to cover pension costs. Instead, they've supported the use of defined contribution plans such as 401(k)s, in which workers decide how much to save and employers may choose to make profit-sharing or employer matching contributions.

For a while, companies at least chose to treat their reduced retirement-savings responsibility as an obligation. But during the financial crisis, many companies scaled back or completely eliminated the matching contributions they made toward workers' retirement plan accounts. In other words, the transition to a retirement savings system that's entirely dependent on the worker's own savings decisions was complete.

The new normal
Since the recovery, some companies have started back on the road to restoring matching contributions. But in many cases, the restored benefits are more limited than they were before they were suspended in the first place. A recent article in the Wall Street Journal cites these examples:

  • United Parcel Service (NYSE: UPS  ) had a 100% match of up to 3% of pay before suspending the match in 2009. The company's current match is now 50% on a maximum of 5% -- cutting the maximum amount for which UPS could be on the hook by half a percentage point. In contrast, rival FedEx (NYSE: FDX  ) initially restored just half its 401(k) match last year but then increased the match back to its original amount for 2011.
  • MGM Resorts (NYSE: MGM  ) went even further, eliminating a 100% match of up to 6% of pay for two years. When the match came back, MGM not only cut it to 50%, but imposed a $500 maximum total amount regardless of salary.

Other companies have taken similar measures. Last year, Morningstar chose to reinstate its match at half of its previous level. In 2009, Starbucks (Nasdaq: SBUX  ) matched 401(k) employee contributions as expected but reserved the right to approve matches on a year-by-year basis.

Of course, not every company has left its workers in limbo. Ford (NYSE: F  ) and General Motors (NYSE: GM  ) chose to reinstate their matches in full. JPMorgan Chase (NYSE: JPM  ) even decided to give workers an additional one-time $500 deposit to partially make up for matching cuts in 2009.

The damage is done
The problem for workers is that with their 401(k) plan investments already vulnerable to economic downturns, the last thing they need is the further threat that their matching contributions will disappear when their employer's financial health deteriorates. Yet having already cut those contributions in times of need, companies won't hesitate to do so in the future.

As unfortunate as it is, the days when you could rely on your employer to take care of your retirement needs are gone. That doesn't leave you helpless, as you can still use your 401(k) to save your own money. But it leaves you with almost sole responsibility to make sure you have enough to enjoy your golden years.

That isn't necessarily a bad thing. With the right investments, you can retire rich. Get started with this special free report, "The Motley Fool's Top Stock for 2011." It'll tell you about an underappreciated stock that's on the cutting edge of its field -- and it's all free for the taking.

Fool contributor Dan Caplinger is a big believer in facing reality. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of UPS, Morningstar, FedEx, Ford, Starbucks, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of GM, FedEx, Morningstar, Ford, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't leave you hanging.


Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 14, 2011, at 5:32 PM, dbtheonly wrote:

    Imagine the "fun" if Medicare & Social Security get turned into a "Prfivate Inventment Plan"

  • Report this Comment On June 14, 2011, at 6:16 PM, chezmiller wrote:

    Makes those government pensions look like a really sweet deal! Wonder why we in the private sector should have to pay for their retirement while no one is worrying about ours.

  • Report this Comment On June 15, 2011, at 1:21 AM, 5000monkey wrote:

    a stable retirement is not a "right", it's neither the governments job nor the employers responsibility to provide retirement. When did we as workers begin to believe that we're entitled to someone else to take care of us after we leave the job force?

  • Report this Comment On June 15, 2011, at 2:59 PM, hachmujt wrote:

    @ chezmiller, remember it does not have to be worker against worker. Some would like us to fight each other and end up at minimum wage with no benefits. It is counter productive for one group of workers to focus on bringing another group down to the lowest level making things "fair." If you really are a worker, our best chance is to focus on bringing everyone up to a living wage.

    @ 5000monkey, I believe that the answer to your question is during the great depression. I learned this high school Civics. FDR pushed for our Social Security system because there were overwhelming numbers of elderly people who could not survive. They were living in horrible poverty. Dignity is a "right."

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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