Current challenges facing workplace retirement plans

Multiple challenges are diminishing the effectiveness of today’s retirement system.

Despite plan design features introduced to strengthen retirement readiness, retirement savings are inadequate

To help workers get the most from their 401(k) or other defined contribution (DC) plans by saving more and investing wisely, employers leaned on insights from behavioral science and legislation like the Pension Protection Act of 2006. Enhancements like automatic enrollment and safe harbor protections in qualified default investment alternatives (QDIAs) helped organizations boost plan participation, allowing them to enroll workers automatically in diversified investment options, such as target date funds. Employers also added features like automatic escalation to help workers increase their contributions over time.

Adoption of these plan design features is now at an “all-time high” according to Vanguard’s annual retirement study, How America Saves.

While more Americans are participating in DC plans than ever before, challenges remain. Increasingly, employees bear the responsibility for both saving for retirement and making those savings last in retirement.

Financial well-being programs aren’t yet helping to close the gap

To address these challenges, many employers have expanded their benefits offerings to include financial well-being programs, which often provide access to unbiased financial advice, coaching and financial education. Despite the increasing availability of financial well-being programs, they’re often underused by employees.

Additionally, Americans are feeling squeezed financially. The percentage of employees who are using their DC savings to cover short-term needs is on the rise.

Consumer confidence is also down in response to inflation, concerns about the potential impact of trade wars and tariffs and turbulent financial markets. Additionally, people cashing out their retirement savings, particularly when they switch jobs, is a persistent risk to their retirement readiness.

Employees want and need help getting financially ready for retirement

According to EBRI/Greenwald Research’s 2024 Workplace Wellness Survey, only 44 percent of people were extremely or very satisfied with their overall benefits packages. When asked about what improvements they’d value most, the top two requests were “greater financial contributions from their employer (51 percent)” and “more resources/benefits to help with financial well-being (32 percent).”

This survey also cited retirement savings plans as an important factor that influences people’s decisions about where they work, ranking second only to health insurance benefits. In the war for talent, retirement and financial well-being benefits can have a meaningful impact on attracting and retaining workers.

Shortcomings of DC plans

To make workplace savings plans more effective at helping workers to bridge the gap from saving to living in retirement, some organizations are exploring ways in which their DC plans can function more like traditional pension plans.

This includes adding features like automatic withdrawal strategies and lifetime-income options to help employees convert a portion of their DC savings into guaranteed income in retirement. However, most employers have been slow to adopt lifetime-income options citing fiduciary and operational concerns.

Traditional pension plans, like defined benefit (DB) plans, are no longer viable for many employers because of the financial risks they create for their organizations with potentially significant cost consequences. Interest rate volatility, combined with uncertain investment performance, have led many employers to close or terminate their traditional pension plans in favor of offering DC plans.

While poor investment returns and declining interest rates increase the likelihood of underfunded pension plans, employers don’t face these challenges with DC plans because in those plans, employees bear the burden of ensuring they’ve saved enough and managed their investments to provide a secure retirement benefit.

Offering pension benefits, in a plan with substantial employer risk mitigation, could provide significant financial benefits to both the organizations offering these retirement plans and the workers enrolled in them.

Employers that offer pension plan benefits help workers stress less and put them on paths toward increased financial security. DB plans also help workers retire at earlier ages than those without guaranteed income. Employees who have pension plans are also naturally more loyal to their employer as pension plans are designed to incentivize and reward tenure, making them a valuable tool to attract and retain top talent, especially in labor markets where competitors don’t offer a DB plan.

Interestingly, some employers have taken steps to reintroduce pension plans to their workforces. IBM recently reopened its pension plan to take advantage of tax savings. Southwest Airlines also reopened its pension plan to provide an additional source of guaranteed income for its employees. More employers would likely follow suit if not for the persistent challenges associated with traditional DB plans.

As workers’ needs and expectations change, and employers are grappling with the best ways to support the well-being of their people, organizations are reevaluating the most effective ways to provide meaningful retirement benefits that attract and retain key talent, while balancing the financial risks associated with providing those benefits.

Designing a better path to financial well-being and retirement income that meets employer and employees’ needs

A hybrid pension plan is a way for employers to offer a DB plan without traditional pension plans’ two biggest risks: interest rate risk and investment risk. Hybrid plans balance risks between an employer and an employee. In a hybrid plan — similar to a DC plan — the employee takes on the investment risk, while the employer retains the longevity risk. Interest rate risk is mostly eliminated.

In other words, employers make contributions to hybrid plans on employees’ behalf. They also invest those contributions, pooling them for potentially greater returns than employees can achieve on their own through a DC plan. Additionally, benefits — and their associated liabilities — are tied to investment returns instead of interest rates, which makes the potential growth more predictable.

Two types of hybrid plan designs are increasingly common offerings: cash balance plans and VAPPs.

The cash balance plan

Cash balance plans are DB plans because they provide determinable benefits to participants upon retirement. They’re funded through employer credits and grow over time with fixed or variable interest credits.

Liabilities are expressed as a hypothetical cash balance account assigned to individual participants, eliminating interest rate risk. Interest credits can be tied to market returns, shifting investment risk from the employer to the employee.

The investments are pooled and professionally managed, which allows for greater risk sharing and better return potential than individual investment accounts in a DC plan, because they don’t have to de-risk their investments as individuals do when they approach retirement. As an example, the since-inception return for the Vanguard 2025 Target Date Fund is 6.44 percent, while the Vanguard 60/40 Fund returned 7.70 percent over the same period.

At retirement, employees can either receive the cash balance in their hypothetical account as a lump sum or as an equivalent lifetime annuity. Offering an annuity allows employees to gain security for the duration of their retirement — there is no chance of outliving your retirement benefits.

Annuities offered through the plan use low-risk assumptions to convert the cash balance to an annuity. This provides a significant savings to the employee compared to purchasing an annuity individually through an insurance company.

The variable annuity pension plan

With a VAPP, employers gain the advantages of traditional DB plans, such as how they attract and retain employees, provide tax incentives to the organization and help employees retire at earlier ages.

Employees realize benefits as well. Like a traditional DB plan, employees are provided with distribution options that allow them to select among various lifetime annuity options, many of which provide coverage for spouses and/or beneficiaries as well. Similar to cash balance plans, investments are pooled and professionally managed, allowing for higher return potential during an employee’s working lifetime and into their retirement years.

Unlike a cash balance plan, those investments (and volatility) continue after the employee retires, which may allow for benefits to increase in most years, offering protection against inflation, similar to how pension plans provide cost-of-living adjustments.

Learn more about VAPPs in our other September 10, 2025 insight.

Comparing DC and hybrid plans

VAPPs provide the potential for both higher post-retirement investment returns and higher account balances at age 65 than both traditional DC plans and cash balance plans, as illustrated in the chart below.

How Investment Returns and Benefits Compare for a Sample Employer Contribution of $1,000 at Age 45

¹ Based on a 5% annuity purchase rate
² Based on 4.87% returns
Source: Segal, 2025

Additionally, employees in VAAPs have fewer decisions to make than employees in DC plans or cash balance plans.

Questions DC Plan, Cash Balance Plan and VAPP Participants Typically Ask

Designing a compelling retirement program

In our view, a well-designed retirement program should provide meaningful retirement income in a stable and secure manner which is understood and appreciated by all stakeholders.

From the standpoint of employees, traditional DB plans remain the gold standard for retirement security. However, for many employers, the costs of a traditional DB plan do not provide the stability and predictability they require.

Hybrid plan designs address the cost stability. From an employer perspective, these plans are more efficient because they generate larger benefits for employees at retirement than DC plans can provide.

Moreover, they provide meaningful retirement income and can help employees value and appreciate their retirement benefit more. They may also support the organization’s strategic vision for attracting and retaining talent.

Download a list of key questions to ask when considering a hybrid plan design