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Why don't businesses offer pensions?

Public employees aren’t the only workers left in the Chicago area still drawing pensions when they retire.

But the number of private sector workers who might enjoy the security of a pension when their working years are done continues to shrink.

Last year, the Management Association of Illinois, a nonprofit organization providing human resources and employee benefits support services to more than 1,000 companies in the state, said that its latest survey revealed that only about 13 to 19 percent of businesses in the Chicago area offered traditional pension plans.

Of the 274 companies surveyed, 81 to 87 percent offered 401k plans or other similar retirement packages to help their employees save for retirement.

Lisa Callaway, vice president and general counsel for the Management Association of Illinois, said the survey results confirm that a trend that began decades ago is continuing:

While states and local governments cling to the traditional pension plan to fund retirements for public sector workers, companies in the private sector of the economy continue to move steadily toward 401k plans and similar plans.

“Companies discovered a long time ago that pension plans just weren’t the best way for them to help their workers retire and maintain the ability they needed to make decisions for the future,” said Callaway. “They found it was very hard to determine 30 or 40 years out, just how much they’d have to put in.”

Callaway said the problems affecting public sector pensions and many of those still in place in the private sector, such as those given to workers for big American auto companies, GM, Ford and Chrysler, demonstrates the problems inherent to pension-style plans.

The main problem, Callaway said, lies in the defined benefit nature of the plans. While pension funds can be invested and returns used to offset employer costs, should those investments lose money or the returns not amount to what was forecast, the employers are left to make up the difference.

“If the plan is underfunded by, say 15 percent, the plan administrators can call in all participants and ask them to contribute to help make up the difference,” Callaway said. “But if they don’t agree, then the plan can enter critical status.”

Should employers’ pension costs grow too great, it will affect their profitability and their ability to adjust to economic circumstance.

While that problem can be mitigated by governments that draw revenue from taxes, it is not an easy question to answer for private companies.

That uncertainty is primarily what prompted many private companies to discard pensions for their employees in favor of so-called defined contribution programs, like 401k plans. The employer can, and often does, match funds contributed by employees to the investment plans. But the onus for growing and managing the funds falls to the employees.

The transition to defined contribution plans – so called because the employee and employer contributions are defined at the front end, rather than the benefits at the time of retirement – began in the 1960s and accelerated through the 1980s and 1990s.

“It quickly became the common view that the employee should be at least equally responsible to fund their own retirement, if not mostly responsible,” said Callaway. “It put more risk on the participant than on the employer, allowing employers a better chance to plan for the future.”

Gerald Jensen, a finance professor at Northern Illinois University, said defined contribution plans also offer advantages for workers, particularly as the nature of the work force has changed in the last few decades.

“It used to be common for someone to work at one company for their entire career,” Jensen said. “Now it makes more sense to have a retirement plan that you can carry with you.”

The differences between pensions in the public sector and defined contribution plans can be stark, however.

Pensions typically are guaranteed and include annual increases. Private defined contribution plans have no such guarantees and no annual cost of living increases.

For employees with 401(k)s to reap a pension-like benefit, Dave Hubbard, president of financial management firm Exemplar Financial Network in Crystal Lake, recommended that they contribute 10 to 15 percent of their annual salary to their retirement plan, get matching funds from their employers, if available, and invest aggressively.

By contrast, public employees served by the Illinois Municipal Retirement Fund contribute 4.5 percent of their annual salary to their pension fund. Teachers contribute 9.4 percent of their salaries to the Teacher Retirement System.

Employer matching costs in those public retirement systems can amount to double what the employee contributes.

And governments in Illinois and throughout the country are now coming to grips with the likelihood that the system may need to be reformed for the system to last.

“It is easy to make promises, but hard to come up with the money to pay for those pensions,” Jensen said.

• Shaw Suburban Media reporter Brett Rowland contributed to this report.

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