401(k) Won for Employers-Now Retirement Risk Hits Employees
University of Scranton's John A. Ruddy, DPS, CFA, CPA unpacks the major shift in retirement planning-from defined benefit pensions to defined contribution plans like 401(k)s.
Jeffrey Snyder, Broadcast Retirement Network
Well, Dr. Ruddy, it's great to see you. Thanks for joining us this morning.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Wonderful to be here, Jeff. Thank you for having me.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, it almost feels like deja vu, in a way. Okay, doctor, you and your colleagues did a lot of research on defined benefit trends. And I wanna start off with a basic question.
The defined benefit plan was originally a retirement vehicle for many Americans, but my read is that this plan has slowly gone away over the last 10, 20 years.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
That is correct. So after World War II, corporate America took its place in taking care of Americans by saying, hey, we'll protect your income during retirement. They used the formula, hey, for every year of service, we'll give you X percent of your final salary.
And when you're old and gray and no longer working for us, you'll still have a paycheck coming in every month. So that is the defined benefit plan. But as you've noted, employers, especially for profit employers, have gotten away from that sort of formula and gone to what we call 401k plans, otherwise known as defined contribution plans.
Jeffrey Snyder, Broadcast Retirement Network
So what was the impetus? I mean, obviously, or not obvious to the audience, but you have to make a contribution every year on behalf of employees in a pension plan. Is that the only reason, that cost?
Is that the only reason why employers like the big three automakers, some of the larger private, IBMs, et cetera, went away from the defined benefit pension plan?
John A. Ruddy, DPS, CFA, CPA, University of Scranton
That was one of the reasons. Certainly they had to make smaller contributions every year. So that was certainly a component of it.
But in addition to that, like the big three automakers that you mentioned, Jeff, they had to recognize significant liabilities on their balance sheet for the fact that Americans were living longer, which is great news for us as a society, but was bad news for their retirement plans because it meant heavier and heavier funding obligations is the perfect way to put it. So as Americans were getting older and older, it meant that the GMs, the Fords, you mentioned IBMs in the world, were having to pay out more and more to fund those retirements.
Jeffrey Snyder, Broadcast Retirement Network
And it's my understanding, Doctor, at least anecdotally, that the defined benefit pension plan is still the predominant retirement vehicle in other sectors of the economy.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Yes, there's two main types of employee covered by defined benefit plans in 2026. Government employees, and probably to generalize a bit too much, those covered by unions. Those are the two primary type of employees that are covered by defined benefit plans today.
Just about every single Fortune 500 company has scuttled their defined benefit plan for the entire workforce. Occasionally, you'll hear about, hey, the C-suite or a very small portion of the company is covered by defined benefit plan, but it's not for the average employee inside a for-profit fund.
Jeffrey Snyder, Broadcast Retirement Network
So the pendulum effectively has swung for a great majority of Americans in terms of saving for retirement. It's no longer on the company directly. It's not a liability for them.
It's now on each of us. That's correct. Whether you're 401k or 403b.
If you're in the private or not-for-profit sector, you've got to save on your own behalf and your family's behalf.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
That's right. It's not that the risk has been somehow magically eliminated. It's just been pushed.
The risk of funding retirement has been pushed from the employer to the employee. If they make their contributions for us in a 401k plan or a 403b plan, if you're part of an educational institution, and you don't have any funds at retirement, employers are gonna say, hey, we did our job. We did as we promised.
That was on you. So you're absolutely correct.
Jeffrey Snyder, Broadcast Retirement Network
So there has to be a lot of people that probably would have liked. I mean, look, I've been working for 30 some odd years, but I've never been in a defined benefit plan. Call me unlucky, but I think there are people like me that would have preferred to have someone else manage.
I'm not an investment expert. I'm an expert in retirement plans in general, but forgetting my own expertise, I don't manage money. I don't know how to manage money.
I don't do it on a day-to-day basis, but we're now asking people to do that. They would probably would rather have someone else do it for them.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
For sure. This has been a significant issue. That wasn't central to our research, but if you read some of the financial press over the past several decades, it's we have to make decisions about, hey, what funds should I invest in?
My 401k plan or 403b plan has a half a dozen, a dozen different alternatives. How should I know what to put it into? So it has been a significant issue educating Americans because we have to answer those questions for ourselves anymore.
It's no longer taking care of us by our borders.
Jeffrey Snyder, Broadcast Retirement Network
So the pillar, the retirement pillars, I guess, doctor, would be social security and we can get into that in a second about how, whether that may or not be around by the time your students start to retire, the defined contribution system, and also your personal savings like your house or your bank account or other savings.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
That's right. Yeah, so that is the formula that employers and the financial press typically espouse for Americans. Your first pillar would be social security, right?
A baseline of income, a monthly check from the government to hopefully fund a portion of your retirement. And then your 401k on top of that. Hopefully that gets you, if not 100% of the way home, at least 80, 90% of the way there.
So, and then like you said, other resources, whether you have savings separate from that, equity in your mortgage, your house or your primary residence, something along those lines.
Jeffrey Snyder, Broadcast Retirement Network
So doctor, the pendulum's kind of swung the other way. I guess 1978 is the effective date of when 10 beta found this loophole and it kind of blew into this industry. Do you ever see an opportunity where maybe there's a middle way where you take the benefits of a defined contribution system and you kind of marry it with some aspects of the pension system?
Do we, is there a third way to combine both of those components so that it's a little bit easier on the individual in terms of predictable retirement income, but also easier on the organization who has to have some responsibility?
John A. Ruddy, DPS, CFA, CPA, University of Scranton
So hybrid plans as they're called do exist, but they are fairly rare. I will tell you for federal employees that started with the federal government, I believe in the 1980s or earlier, they were covered by a system called CSRS, which was built on the theory that, hey, we're going to take care of 100% of our employees and retired employees retirement. They moved to a system called FERS, Federal Employee Retirement System, that was built on, hey, we're going to make a contribution that's a defined benefit plan, but we're also going to have something called the Thrift Savings Plan, the TSP, which operates basically like a 401k plan.
So it's exactly the formula you mentioned. Social security for your foundation, defined benefit plan, and a 401k plan for lack of a better term, defined contribution plan. So you have a DB plan, a DC plan on top of social security.
So it's a kind of mixture of all three.
Jeffrey Snyder, Broadcast Retirement Network
Do you ever see, I know IBM recently discussed reopening their pension plan. Do you think the pendulum could ever shift back? Because I think we have a lot of people retiring now.
It's something called peak 65, where I think 10,000 people a day are turning 65. I don't know if that's an accurate number, but that's what I seem to be repeating in my head. Do you think there's ever a time where we might be able to move back fully to the pension, similar to what IBM's doing, where they can fund their pension, and do it in a meaningful and strategically smarter way or better way?
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Yeah, I suppose it's possible. I don't think corporate America and any organization that has shareholders wants to take the risk that, hey, we'll continue to live longer. We as Americans are, if you look at the mortality tables, they kind of crested and even started to drop during COVID decline.
But if Americans were, say, the next generation, like today's current college students, if they were to live 10 years longer than our generation, Jeff, and these plans were existing or re-existed inside the IBMs, the JP Morgans, the big three automakers, they would then have to fund that. And I don't think that's a risk their shareholders want to take. But it could happen.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I guess anything's possible. I do want to kind of wrap up. This was in your research, but I wanted to ask you about social security.
So this, as we've been talking about this morning, social security is an important pillar, but yet there are some challenges there demographically, because it is a pay-go system. Is it your assumption? I know you read a lot of the financial press, the popular press, you do as part of your research, part of your daily behavior habits.
I mean, that's an important benefit that people have already paid into. Do you see that being resolved in some way, shape or form so that the trust fund is funded longer than 2032 or 2030, depending on who you're talking?
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Yeah, so from my vantage point, Jeff, I always say to people who ask about it, social security doesn't have financial problems, it has political problems. So it's not an issue of can we fund it, it's what are the changes that have to be made by Congress in order for it to continue to work as it has over the past several decades. Now, I will tell you, you mentioned that there are projections over the next, say, eight to 10 years where there'll be more cash outflows than there are cash inflows, right?
And at that point, benefits, the social security checks will be haircut or reduced by a certain percentage. And I will tell you candidly from my own retirement projections, I'm owed X, I'm counting on half X. The haircut percentage has been debated.
There's a statutory automatic reduction of benefits for all Americans. And I've even haircut it over that. The numbers I've seen have been in the 35% to 40% neighborhood, but I've just automatically, okay, I have these credits and this is what I'm due.
I'm only gonna count on half of that for my retirement. Unfortunately, the topic you bring up, Jeff, it's going to disproportionately impact lower income wagers, which, you know, it starts a debate between the right and the left, right? But it's gonna hit the lower income people harder than it will the more affluent Americans because the poor people won't have large 401k plans or savings accounts to rely on as well.
So it's unfortunate, but it could become a very painful topic for low income wagers.
Jeffrey Snyder, Broadcast Retirement Network
So does, you know, given that potential outcome in terms of how you're calculating your own benefit, I mean, is it the private, let's talk about the private retirement system for a second. It seems like just because of the way social security is funded and it's structured, it's really like money goes in, money goes out. There are not enough people working to support the people that are retired.
So is the private retirement system really the, and whether it's the 401k, a hybrid, some other, is that really the best option because you don't have these political shenanigans that come into play every so many years?
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Yeah, it's true. But a lot of lower wage earners aren't covered by a 401k plan. They would have to go into an IRA where they don't have an employer maybe matching their contributions.
So it sounds great concept, but in practice, you know, say someone in a line of work that doesn't have an employer with a 401k plan, unfortunately, they're going to have to find some other way of funding their retirement.
Jeffrey Snyder, Broadcast Retirement Network
Do you think, you know, I don't think the U.S., I guess I'll just close with this question because I could talk to you for hours. I probably should come to screen and come to one of your classes. But are there countries that you look at or think about that maybe they're dealing with this?
You know, you look at China, you look at Germany, some of the other European countries that have pensions. It's not just the U.S. Are there any solutions out there that we could apply here that would fit into our governance structure? You know, the way the United States is pretty unique in its political apparatus, right?
But anything that you look at and say, hey, that might be of interest, we could apply that here.
John A. Ruddy, DPS, CFA, CPA, University of Scranton
Yeah, so you're absolutely correct. This is an issue that's pervasive. And it's an intergenerational equity issue.
We're leaving a problem for our children and grandchildren to say, hey, good luck with that one, right? Hey, you've got trillions of dollars to figure out where you want to come up with this stuff. But it exists in Europe.
It exists in Asia, as you mentioned. It's a tough nut to crack. Funding retirement is incredibly expensive, especially when people are living longer and longer.
It's tough to fund. So it's an explanation as to why Americans are working longer and longer, as are people all around the world. That's one way to come up with a solution.
Hey, I can't afford to retire, so I'm gonna continue to work and continue to make contributions.
Jeffrey Snyder, Broadcast Retirement Network
But you also, and we don't have time to get into this, but you have to be able to work, right? You have to be able to find a job. You have to, you know, and we didn't even talk about artificial intelligence.
Doctor, we're gonna have to leave it there. Great analysis. And look, we'd love to have you come back, continue the conversation.
Thanks so much for joining us. And we wish you a very great rest of the day, sir. Pleasure being here, Jeff.
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This story was originally published July 1, 2026 at 6:30 AM.