It’s time for our retirement security to declare independence from 401(k)s

News of the “Brexit” vote trickled over the Atlantic Ocean late in the evening last Thursday. By Friday morning, Facebook and other social media sites were overflowing with questions about what this meant for the U.K., what this meant for Europe, and what this meant here at home. And amid those questions were nervous investors worrying about their 401(k) and IRA balances.

Those with retirement assets in the market are right to worry. The Economist predicts that a recession in the U.K. “seems likely.” Swings in the U.K. markets had started prior to the vote, and now many investors will wait on edge to see how political turmoil across the pond will ripple into U.S. markets. As of Friday morning’s opening, the Dow Jones, S&P 500 and NASDAQ all opened down 3%. U.S. coverage of the Brexit encouraged investors to wait until their quarterly statements to take a look at their 401(k) balances and warned that Americans would feel a “pinch” in their 401(k)s.

It doesn’t have to be this way for Americans who are doing their best to save for a dignified retirement. Decades ago, many more Americans had access to pensions – group plans designed to allow them to weather financial crises. During the 2008 recession, for example, pension plans across the country took a hit. But as of 2015, most plans have recovered and are nearing healthy or full funding status. Average funding levels moved from 73 percent in 2014 to 74 percent in 2015, according to the Center for Retirement Research at Boston College.

Although Brexit will certainly impact pension funds as well, pensions have several big advantages over 401(k). First, pensions are pooled accounts that share market risk among employers and employees. Let’s compare two individuals who were ready to retire today: Mary and Susan. Mary is in a 401(k), left to fend for herself against market conditions. When she looks at her balance later this week (a balance that was probably already too low to get her through retirement), her nest egg may be considerably smaller than what she thought it would be. Her choices are to: put off retirement, make hard choices about which of her basic needs she will cover first, or rely on state services or her family to fill the gap in her retirement savings.

Susan’s pension, on the other hand, is structured to pay out a defined benefit each month until she dies. She can retire securely, knowing her check will arrive each month. The pension system, continuing to receive contributions from younger workers, will earn investment returns as the market recovers. Ten, twenty, maybe thirty years down the road it will have recovered its losses from Brexit and be fully sound. An individual, like Mary, does not have those ten, twenty, or thirty years.

Second, pension funds are professionally managed while 401(k)s rely on individuals to wade through hundreds of complex financial instruments to determine how to meet their needs in retirement. At a time like this, many individual investors will move money to safer investments and only move their money after the market has recovered. Professionally managed pension funds are better equipped to recover losses over time, and the higher yearly returns generated by pensions over 401(k)s prove that.

It’s long past time for Americans to re-think our approach to retirement security. The 401(k) is a failed model for most working men and women. We need to move back toward systems like a pension where risk is shared among employers and employees, funds are professionally managed, and no individual is left alone to wonder how the Brexit wrecked their retirement.

Bailey Childers is executive director of the National Public Pension Coalition.

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