The failure of national pension policy to protect defined benefit plans, in both the United States and Canada, means that workers without union representation now face a future of retirement insecurity. Forced to rely upon their own savings in 401(k)-type retirement plans, when these workers reach retirement age they will face the biggest challenge of their lives:  how to make their 401(k) accounts last until they die.

Union workers with defined benefit plans, like the Central Pension Fund, will not face this challenge.  At retirement they will know exactly what their monthly benefit will be for the rest of their lives.

Because 401(k) plans began replacing defined benefit plans only within the last 20 years, workers with 401(k)s are just now beginning to understand the magnitude of the dilemma they face. That dilemma is how to avoid outliving their 401(k) account. It is only recently that experts have begun to analyze this dilemma and advise workers on how to make 401(k) accounts last for a lifetime.

There now exists a consensus among financial experts, that in order to assure a 401(k) account will last until death, 401(k) retirees should never spend more than 4% of their account balance in a year. See for instance the following articles available on the internet:  Retirement Spending: The 4% Solution by Rande Spiegelman, August 2006, at www.schwab.com; The Risk of Ruin for Retirees by Andy Mayo, May 2008, at www.investopedia.com; and Retirement Spending Rate Confusing to Many, Associated Press, May 2006, at www.msnbc.com.

The flip side of a 4% spending rate is a 25 times accumulation rate. That is, once you determine what level of benefit you need to take from your 401(k) account each year, you need to have 25 times that amount in your account at retirement to meet the 4% spending limit.

Here is a simple example:  if a 401(k) retiree determines that he or she needs to be able to draw $1,000 a month benefit from their 401(k) account for life --- $12,000 a year --- they must have a balance of $300,000 in their account at retirement. This is because 4% of $300,000 is $12,000 (and 25 times $12,000 is $300,000). To fund a $24,000 a year benefit would require a $600,000 balance; a $40,000 benefit would require a balance of exactly $1 million at retirement.

The mathematics of 401(k) retirement are both simple and stunning. The simple part is determining the amount you need to accumulate in your account before retiring. The stunning part is how large that amount is.

And understanding that you need 25 times the amount of your annual benefit in your account at retirement, makes comparing a 401(k) to a defined benefit plan very straightforward.

Take the Central Pension Fund for example. If the same retiree discussed above had earned his or her retirement benefit in CPF instead of a 401(k), they would not need $300,000 in their account to receive $1,000 a month benefit for life. They would need a CPF account balance of only $33,333.

CPF currently pays a benefit equal to 3% per month times the total contributions made on the participant’s behalf. 3% of $33,333 provides a monthly benefit of $1,000 --- for life. In other words, you need to accumulate almost 10 times as much in a 401(k) account to receive a benefit equivalent to CPF.

The 4% spending rule for 401(k) retirements now makes it simple to determine how large an account is needed to retire. The 4% rule also makes it simple to compare 401(k)s to defined benefit plans like the Central Pension Fund. And, as easily demonstrated, there is no comparison.