The Golden Age of Pensions
What We Lost, Why We Lost It, and How to Rebuild a Pension of Your Own
By Ron A. Rhoades, JD, CFP® and Chris Brown, Ph.D., CFP®
My grandfather worked for the federal government for forty years. When he retired in 1971, his employer sent him a monthly check, and that check arrived without fail until the day he died, twenty-six years later. He never had to choose a mutual fund. He never had to decide between Traditional and Roth. He never had to wonder, anxiously, whether the “four percent rule” would hold this time.1 His pension simply showed up. That model of retirement – once the American default – is now nearly extinct in the private sector. Understanding what we lost, and why, is the first step toward rebuilding something like it for ourselves.
What a Real Pension Promised
A traditional defined-benefit pension promised three things that no 401(k) promises. It promised a specific monthly income, calculated by a formula tied to your years of service and your final salary. It promised that income for life – yours and, often, your spouse’s. And it promised that the employer, not the employee, would bear the investment risk. The pension fund’s assets might rise or fall; what arrived in your mailbox did not.
In 1975, 88% of Fortune 500 companies offered defined-benefit pensions to most full-time workers. By 2024 that figure had fallen below 14%.2 In its place we built defined-contribution plans – the 401(k), the 403(b), the 457(b), the federal Thrift Savings Plan – in which every employee is now their own pension fund manager.
Why We Lost Them
The conventional explanation is that pensions were too expensive. That is true in part: under the rules in force after ERISA in 1974 and the funding-adequacy reforms of the 1980s and the Pension Protection Act of 2006, employers had to fully fund the actuarial cost of every promise on its accounting books. Stock market declines, combined with falling interest rates that increased the present value of future pension promises, made defined-benefit plans expensive and volatile from a corporate-balance-sheet perspective.
But cost is only part of the story. The other part is that the workforce stopped staying with one employer for a career. The median U.S. worker today changes jobs every 4.1 years.3 A defined-benefit plan rewards long tenure dramatically (the benefit accrual curves are back-loaded toward the final years); a worker who switches employers every five years gets little from any of them. The 401(k), with its immediate vesting in the employee’s own contributions and often a three- to six-year vesting schedule on the match, fits a mobile workforce. It was, in its time, an innovation that solved a real problem.
What it did not do, and what no one quite said out loud at the time, was guarantee any particular retirement outcome. The risk did not disappear when defined-benefit plans were replaced. It just moved from the employer’s actuaries to the employee’s kitchen table.
“When the system stopped guaranteeing a retirement, it began requiring one of us.”
What We Lost
The move from pensions to 401(k) plans resulted in primarily three losses:
- Longevity insurance. A pension paid until you died. A 401(k) balance does not. A retiree with a $1 million 401(k) at 65 must decide – alone, without an actuary – how much to spend each year, knowing they could live to 95 or to 75 and having no way to predict which.
- Professional investment management on the participant’s behalf. Pension funds were managed by institutional teams, with proper diversification, modest fees, and long time horizons. The median 401(k) participant typically manages their own money with less expertise, often more emotion, and often higher fees.4
- Forced discipline. Pension contributions came off the top, before the employee saw their paycheck. 401(k) participation, by contrast, requires a choice. Auto-enrollment has helped, but the default deferral rate (typically 3–6%) is still well below what most households need in retirement, even with employer matches.5
How to Rebuild a Pension for Yourself
If the private sector is not going to give you a pension, you must build one. This is, in fact, achievable for most professional households. The steps:
- Maximize the employer match. Treat the match as the foundation of your private pension. In 2026, average employer matches are around 4.5% of salary.6 Capture every dollar.
- Aim for a 15–20% total savings rate (including the match). Pension funds used to set aside roughly 10–15% of payroll for retirement. You are doing what the pension fund did; budget accordingly.
- Build tax diversification across Traditional and Roth. A pension paid taxable income every month. Your private pension should give you the option to control taxable income. Roth balances are the lever.
- Plan for longevity. Consider, at retirement, allocating a portion of your portfolio to a single-premium immediate annuity (SPIA). In 2026, a SPIA from an insurer with strong financial strength ratings, as evaluated by independent rating agencies such as AM Best or S&P, is – in effect – a private pension. Used judiciously – for perhaps 20–30% of retirement assets, not all of them – it replaces some of the longevity insurance that the old defined-benefit plan provided. If you do these – shop the marketplace carefully.
- Treat Social Security as the second foundation. Social Security is a defined-benefit pension that almost every American has. Delaying claiming from 62 to 70 increases the monthly benefit by roughly 77%.7 For most healthy single people, delaying is the highest-return, lowest-risk investment available for most healthy individuals, according to research from the Social Security Administration and retirement income researchers.8
- Find a fiduciary advisor. Pension funds had professionals. Your private pension deserves one too. A fee-only fiduciary advisor, paid only by you and legally required to put your interests first, fills the role the corporate actuary used to fill.
The Quiet Loss
My grandfather did not have to be financially literate. The system carried him. We are not so fortunate. The shift from defined benefit to defined contribution moved real responsibility from employers to individuals. It also moved real risk – longevity risk, investment risk, behavioral risk – onto households that have, on average, never been trained to bear it.
This is one reason Scholar Financial exists. Building a private pension is harder than receiving a real one. But it is achievable, with discipline, the right tools, and the right fiduciary guidance. The system is not coming back. The retirement still can.
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About the Authors
Ron A. Rhoades, JD, CFP®
Ron Rhoades is an Associate Professor of Finance at the Gordon Ford College of Business, Western Kentucky University. He also serves as a financial advisor at Scholar Financial, a practice within XY Investment Solutions LLC. With a background as both an attorney and a CERTIFIED FINANCIAL PLANNER™ professional, Ron is a nationally recognized authority on the fiduciary duties of financial advisors.
Chris Brown, Ph.D., CFP®
Chris Brown is a faculty member in the Department of Finance at the Gordon Ford College of Business, Western Kentucky University, and a financial advisor at Scholar Financial, a practice within XY Investment Solutions, LLC. He holds the CERTIFIED FINANCIAL PLANNER™ designation and a Ph.D. in Finance. His research and teaching focus is on behavioral finance, retirement planning, and evidence-based investment strategies.
Disclosures
The opinions expressed in this commentary are solely those of the individual author and do not necessarily reflect the views or opinions of XYIS. These opinions are based on information available at the time of posting and are subject to change without notice. XYIS does not commit to updating any posted positions or commentary to reflect subsequent developments. While the information and reasoning used to form these opinions are believed to be from reliable sources, XYIS does not verify this information, and no guarantee is provided regarding its accuracy, completeness, or validity. XYIS disclaims any and all liability for actions taken or not taken based on the content of this article. No warranty, express or implied, is given in connection with the content provided.
Advisory services are offered through XYPN Sapphire and its various IAR brands under which it operates. XYPN Sapphire is an SEC registered investment adviser. For additional disclosure and privacy information, please visit XYPNSapphire.com/disclosures.
References
- Bengen, W.P., “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, Vol. 7, No. 4 (October 1994), pp. 171–180.
- Willis Towers Watson, Retirement Plan Landscape: Shift from DB to DC Plans Among Fortune 500 Companies (annual survey). See also: Munnell, A.H. and Soto, M., Why Are Companies Freezing Their Pensions? Center for Retirement Research at Boston College, Working Paper No. 2007-22 (2007), available at crr.bc.edu.
- U.S. Bureau of Labor Statistics, Employee Tenure Summary, USDL-24-[current release number] (Washington, D.C.: BLS, 2024), available at bls.gov/news.release/tenure.nr0.htm.
- Investment Company Institute, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses (current edition), available at ici.org; or Brightscope/ICI, The BrightScope/ICI Defined Contribution Plan Profile (current edition).
- Vanguard, How America Saves (Malvern, PA: Vanguard, current edition), available at institutional.vanguard.com
- Vanguard, How America Saves (current edition); Fidelity Investments, Building Financial Futures (current edition).
- Social Security Administration, When to Start Receiving Retirement Benefits, SSA Publication No. 05-10147 (current edition), available at ssa.gov/pubs/EN-05-10147.pdf. Note that this figure is approximate – the precise percentage gain depends on the individual’s full retirement age, which has changed over time.
- Stanford Center on Longevity / Society of Actuaries, Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity (current edition); or Kotlikoff, L., Moeller, P., and Solman, P., Get What’s Yours: The Secrets to Maxing Out Your Social Security (Simon & Schuster, 2016).
