What really happens when pensions disappear

401(k) or IRA? Here's how to choose
401(k) or IRA? Here's how to choose

Plans such as 401(k)s and their ilk have been part of the retirement landscape for decades, and discussions of their pros and cons relative to traditional pensions go back even further.

Now researchers have gone from the theoretical to the concrete and examined exactly how employees respond when their traditional pension plan is replaced. It's not pretty.

The new plan they examined, for employees of the state of Utah, was less generous than the pension plan it replaced, but few employees took steps to supplement their retirement savings. Affected employees also began leaving their jobs at a faster rate.

"It is important not to neglect the effects of retirement plan restructuring on other public employee behavior. Indeed, such outcomes could undermine state governments' ability to deliver services promised to their citizens," the researchers concluded.

"If a state or any other organization is thinking about reducing their benefits, they should consider the impact on worker behavior," said Robert Clark, a professor at North Carolina State University's Poole College of Management and an author of the study. "Workers' behavior might have adverse effects on the organization. Worker turnover could do that. Workers' being less prepared for retirement could do that."

Their findings were published by the National Bureau for Economic Research this month.

The perils of choice

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Utah was one of many states revising or replacing their retirement plans in the wake of the 2008-09 financial crisis, which decimated many states' pension funds. A 2013 study by Boston College's Center for Retirement Research found that 29 of 32 public pension plans made changes after the financial crisis to reduce their costs. (Tweet This)

When Utah made its changes, the legislator sponsoring the legislation said the goal was to ensure the state could meet its existing pension obligations and reduce the risk of a pension-related bankruptcy.

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The new plan allowed employees to choose between a defined contribution plan and a hybrid plan that had both defined contribution and defined benefit elements. Employees who did not choose one of the plans were automatically enrolled in the hybrid plan after a year.

About 60 percent of the people hired after the pension reform took effect defaulted into the hybrid plan, the researchers found. Among the employees who made an active choice, slightly more than half opted for the hybrid plan.

The post-reform plan choices were less generous than the old retirement savings plan, so employees could well have chosen to supplement their plan savings at a greater rate—but researchers found that did not happen. Contributions to supplemental retirement savings accounts fell during the financial crisis so that just 25 percent of new hires were contributing between 2009 and 2011; after the retirement plan change, that rate dropped further to less than 20 percent.

Employees who actively chose a retirement plan option contributed more than 20 percent, on average, but those who defaulted in contributed significantly less.

"Maybe if you are defaulting in one area, that is explaining your behavior in other areas," said Olivia Mitchell, a professor at Wharton and a co-author of the study. Defaulters, she said, "end up on the path of least resistance."

Read MoreThe downside of automatic enrollment

The changes to the Utah plan also left employees with less of an incentive to stick with their jobs. Employee turnover had been running at 13 percent before the change; afterward it increased to 17 percent, the researchers found. That may have been partly attributable to an improving economy, but either way, their employer, the state of Utah, was left needing to fill more job openings.

"When considering fundamental changes in a pension plan, as every state government is doing now, they should consider how workers will respond to that and the impact on the quality and quantity of the public sector labor force," said Clark.

Some employers are taking different tacks. Tiered retirement savings offerings, which offer options with varying degrees of complexity, are one example. These options may range from a very basic plan focused on target-date funds to more elaborate ones allowing investments in stock and bond funds or even in individual securities. The University of Pennsylvania recently adopted such a tiered plan, Mitchell said.

That approach works especially well for "a heterogeneous workforce," she said, because it aims to avoid overwhelming people who want a simple plan, but give choices to those who want them.

"If you have a one-size plan, it's going to be easier to explain, and perhaps less expensive," she said. "On the other hand, people have different needs and different risk preferences."