First off, remember there are two types: defined benefit and defined contribution.
With defined benefit, there’s a formula based on your years of service and your salary, and that’s used to calculate a figure you get for the rest of your life.
Underfunding of these is a very real concern - years back when I worked on a project for the Federal government dealing with retirement plans, it was fairly well known that the plans were underfunded. Many companies have gotten rid of them for this reason, and some existing ones have failed outright.
Defined contribution means the company puts aside x dollars a month, or x percent of your salary, and that’s invested somehow, and when you retire you can convert it to an annuity, or take it as a lump sum, or some combination thereof. If the market underperforms those last few years - oh well, sucks to be you. These annuities typically have the option of reducing your payout so your spouse gets something once you croak.
A further variant on defined contribution is where it’s invested in something much like a 401(k) - where YOU have to make the investment choices. The rules regarding withdrawal / rollover are different from a regular 401(k); as it’s a pension vs a straight 401(k), you have to get spouse signoff before moving the money elsewhere (as I found when I was rolling over my 401(k) from my previous employer; I wound up leaving the pension portion in place).
The traditional defined benefit pension - you get x dollars a month forever - is essentially a thing of the past, at least in the private sector. Public sector still has them, though the benefits are not nearly as good as someone starting work decades ago.
Using the Federal example, CSRS (Civilan Service Retirement System) gave a better pension overall for someone who was a career employee. It was a full defined-benefit plan. In the 1980s, the government implemented the FERS (Federal Employees Retirement System) which is a hybrid program. It still has a defined benefit component, but also requires you to contribute to Social Security and offers the Thrift Savings Plan, which is essentially a 401(k). As with most private employers, this has the result of shifting some of the burden on you to see that you’ve saved enough and are invested correctly.
When a pension scheme is converted to an annuity at retirement, it gets crunched by actuaries who look at a lot of different factors when computing the benefit, including (I assume) average lifespan, marital status, and so on. Their assumption is that John might live til 90, but Mary might croak at 70, so they figure out a payout amount assuming people live on average to age 80 or whatever. So they lose money on John but win on Mary.
I think these are typically offered by insurers. As long as those insurers are sound, you should be OK under their rules - but if, say, Prudential were to fail, a lot of people would be screwed. I don’t know if those plans are covered under the Pension Benefit Guaranty Corporation or not (most defined benefit plans are).
My own career’s retirement coverage has gone from:
- Defined benefit - if you stayed there 10+ years (I did not)
- 401(k) only, with some employer matching
- 401(k), with some matching (though you couldn’t contribute until you’d been there a year or so, and it was a while before you were vested in their portion), as well as a defined benefit plan (I’ll get 250 a month when I retire, woohoo!)
- 401(k) with some matching, plus a defined contribution plan that was not market-based: they credited it with interest each year. You got that benefit even if you did not participate in the 401(k)
- 401(k) with matching, plus a separate defined contribution plan that was 401(k)-like i.e. market-based. The company put a percentage of your salary into that.
- Pure 401(k) where the employer’s contribution goes directly into your 401(k) and is managed along with the rest of your money.
In this last scenario, the company money does not fall under the “pension” withdrawal rules. I could cash it all out on retirement without consulting with my spouse at all. It’s a risky option; with the 401(k)-like plans, you can’t get to that money as easily and are far more likely to leave it in place vs spending it.
So - all in all, the companies do in fact realize that pensions are economically unsustainable, and are getting away from them as fast as they legally can. The push to 401(k)-only plans is especially interesting. If your investments do well, you can wind up better off. But as noted: you could cash that out on leaving a job, and wind up with nothing (under schemes where the company money was separate, you couldn’t touch it).
When my employer went to a 401(k) only scheme, their matching changed. You’d get x % free even if you didn’t put your own money in, then they’d match 1-for-1 up to a certain percentage. If you saved enough of your own money, you’d get the same matching overall as before - but if you saved less, you’d get less matching. Used to be, you got 5% free, and they’d match half of up to 6% - so you’d get a total of 8%. Now, you get 2%. If you save 6%, you wind up with the same 8%. If you save 2% of your salary, the old plan would get you 6%; the new would get you 4%. If you save 4%, the old would get you 7% and the new would get you 6%.
AND, companies are now changing their plans so that you don’t get the matching unless you stay there the full year. Get laid off or quit December 1? Too bad, so sad, thanks for the money, sez the employer.
401(k) plans have tax issues if you retire early - like before 59 1/2 years old. You can’t just dip into them willy-nilly; there are rules about “substantial equal payments” or some such if you need to use them before that age, otherwise penalties apply. I don’t know how other defined contribution plans would work; presumably they could be converted to an annuity, or withdrawn as a lump sum (despite the tax consequences), but I don’t know if penaalties would be assesed. A defined benefit plan would, I think, just be taxed as normal income… when my company that had one divested our division, I could have started collecting that pension right then. As I didn’t need the 50 dollars a month, I opted to leave it be :).