The 401(k) Effect Employees Who Won’t Retire

By Staff Report

Mar. 10, 2008

While shifting workers from traditionaldefined-benefit plans into 401(k) plans may allow corporations to lower their retirement plan expenses, many companies may wind up dealing with an unexpected problem.

“Because there’s no guaranteed retirement income with a 401(k), employees will work longer than they would have if they were in a traditional pension,” said Alan Glickstein, senior investment consultant at Watson Wyatt. “And this will curtail an employer’s ability to efficiently manage their workforces.”

Glickstein pointed to a new Watson Wyatt study revealing that workers whose non-Social Security retirement incomes are primarily derived from 401(k)s are significantly less likely to retire than workers who are covered by a defined-benefit plan.

Employees with defined-benefit plans know exactly what their pension payout will be—making planning for retirement easier—unlike those with defined-contribution plans like 401(k)s. What’s more, it makes little financial sense for employees with DB plans to keep working once they are eligible to receive the pension. Typically, the payout from a DB plan won’t increase beyond what the company has promised even if employees continue to work after they become eligible for a full pension.

That’s not the case with 401(k) plans, where the more an employee puts into the plan, the bigger the payout—assuming, of course, the employee’s plan investments pan out.

“It makes it much more challenging for companies to anticipate the rate at which their employees will retire, and also the exact periods that these employees may leave the workforce,” Glickstein said.

Indeed, Watson Wyatt’s research shows that the timing of retirement for workers in 401(k) plans is often directly influenced by business cycles, as well as the ebb and flow of the stock market. To wit: Employees whose 401(k) plans have suffered a significant investment loss are much less likely to retire (roughly 1 percent less likely to retire for every 10 percent drop in the stock markets, according to Watson Wyatt data).

Ultimately, when there are market booms, 401(k) participants retire “just when companies need to add workers,” according to the Watson Wyatt study, and when the markets decline, 401(k) participants “stay at work just when companies want to cut the workforce.”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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