The origination of private pensions date back to 1875 when American Express established the first employer pension plan in the United States. Their objective was simple, to create stability and peace of mind for their workforce.
In those days it was common for workers to spend their careers with one company from start to finish, and providing a clear path towards a stable retirement helped employers maximize productivity. In today's economy it's hard to imagine millennials dedicating more than five years to a single company, let alone their careers. Generation X, those born between 1965-1976, averaged two job changes in their first 10 years out of college.
This pace has accelerated quickly and now research suggests that new entrants into the workforce will change jobs four times before turning 32. Traditional pensions need to evolve with the changes in perspective people have about their careers and the loyalty to the companies they work for.
The current state of pension plans
In response to both the evolving workforce dynamics and various stock market crashes, employers have stopped offering pensions, largely replacing them with 401(k)s. Traditional pensions, or defined benefit plans, offer a steady stream of monthly income, placing investment and longevity risk on the plan provider, which has historically been employers.
With 401(k)s, or defined contribution plans, employees decide how much to save and choose their own retirement investments, receiving no guaranteed benefits and thus shifting risk from employer to employee. In fact, 401(k)s were meant to be supplements to, not replacements for, traditional employer pensions. The need for dependable retirement income still exists today, as the average employee without a pension is left without a clear path to navigating investment and longevity risks in retirement.
While there’s no easy way to get a pension today, the foundation exists. Deferred Income Annuities (DIAs) are insurance products that offer retirement income for life in exchange for a lump-sum payment today. Currently DIAs are difficult to access requiring a large up-front investment, for example: a 45 year old could invest $100K today and begin receiving $19K / year starting at age 70.
Pension innovation sets in
That's where Abaris comes in, a NY-based startup that’s creating the Personal Pension - a way for anyone, regardless of employer or employment status to create a pension for themselves with fully flexible funding. Once they launch later this summer, you’ll be able to go to their website and invest as little as $100 per month to create a pension-like lifetime income stream that’s diversified across insurance companies. For example, a 30 year old that contributed $300 per month until retirement would have a $20K pension to supplement their Social Security starting at age 70.
The Personal Pension successfully addresses the two major issues that broke the employer-based pension model. First, the pension liability that became too large for employers to handle sits with insurance companies who exist to manage risk. And second, one’s pension is independent from their employer and portable from job to job. For anyone without a pension looking to supplement their Social Security and create stability to balance their market-based portfolio, head to Abaris’ website to learn about how Deferred Income Annuities fit in a retirement portfolio, and later this summer, to sign up for the Personal Pension.