Marketplace - What’s better, a pension or a 401(k)?

Episode Date: October 24, 2024

Machinists who have been on strike against Boeing for over a month just rejected a second contract. A major sticking point? Pensions, which the company suspended 10 years ago, in favor of 401(k) contributions. In this episode, we weigh the pros and cons of each. Plus: Colorado’s oldest business will become a co-op, a tight housing market means fixer-uppers are cool again and recent hurricanes test the catastrophe bond market.

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From American public media, this is Marketplace. In Los Angeles, I'm Colin Riznall. It is Thursday today, 24 October. Good as always to have you along, everybody. This has been a terrible, horrible, no good, very bad week for the Boeing company. There was that $6.2 billion quarterly flood of red ink the plane maker announced yesterday morning. And then last night, the more than 30,000 machinists who've been on strike for almost a month and a half now voted to stay out.

Better pay and benefits are part of what the union wants. Also though, retirement plans, specifically a return to defined benefit pension plans, which the company suspended 10 years ago, in favor of contributing to employees' defined contribution plans, 401Ks, in other words. That shift in the private sector from pensions to 401Ks has been going on for decades. But as organized labor has been having its moment of late, workers and unions are pushing back. Marketplace's Mitchell Hartman has this pension and 401k plan primer.

Broadly speaking, defined benefit or pension plans are funded by employers and pay retirement benefits for life. Defined contribution or 401k plans are usually funded by the employer and employee, and the employee then manages the investments for as long as they last. Pensions put financial pressure and risk on employers to fund and manage them. Because 401ks put that pressure mostly on workers, they've become more popular with

employers. But now there's pushback led by unions. I am not surprised that the Boeing workers rejected the contract. Teresa Gillarducci studies retirement at the new school. She says workers increasingly understand the risk inherent in 401Ks. A 401K plan does not guarantee a stream of income for the rest of your life. People are filled with stress having to manage their nest egg. But pensions have disadvantages too, says Alicia Munnell at the Center for Retirement

Research at Boston College. I am surprised with the enthusiasm for defined benefit plans. Munnell says in the private sector, pension benefits typically aren't indexed to inflation, which has soared in recent years. And the key loser was people who had defined benefit plans that did not keep pace. Another ding against pensions is the fear the employer sponsor will go belly up. Monique Morrissey at the Economic Policy Institute says that concern is overblown.

In the private sector, benefits are guaranteed by the Pension Benefit Guarantee Corporation. In the public sector, pension funds come from government coffers, and Morrissey says one way to balance the budget is by not contributing the full amount to the pension. All the experts I talked to agreed that the biggest problem today is that aside from Social Security, millions of workers don't have any plan, 401k or pension, to help pay their bills in retirement. I'm Mitchell Hartman for Marketplace.

On Wall Street today, Boeing off a bit, bond yields took a breather, the major indices mixed. We will have the details when we do the numbers. Turns out there is in, a market for everything, including climate change. As more extreme weather happens more often, what are called catastrophe bonds are on track for a record year. The website Artemis counts more than $13 billion in new cat bonds so far this year, with the total market now approaching $48 billion. Born after Hurricane Andrew back in the 1990s, cat bonds are a way for governments and insurance

companies to spread some of their risk from major disasters to the capital markets, and they are also a way for investors to profit from that risk. So after hurricanes Helene and Milton, we asked Marketplace's Amy Scott for an update on the cat bond market. Investors like catastrophe bonds for two main reasons. First, they tend to pay a higher return than traditional bonds, around 11% recently, because they're riskier. Steve Evans The returns have been good over the last few

years and that always helps. Amy Scott That's Steve Evans, who tracks the market as editor-in-chief at Artemis. More importantly, he says, cat bonds offer investors a form of diversification. They don't move in tandem with stocks or other assets. They are very disconnected from broader financial markets. And so for investors, they're seen as an attractive alternative that can deliver them some income through times when perhaps other asset classes are more volatile. Here's how they work. An insurance or reinsurance company or sometimes a government will sponsor

a bond covering losses from a specific event or events, like named tropical storms in the Atlantic, or US wildfires, or European wind storms. Investors in the bond pay into a trust that the sponsor can only access if the event happens and meets certain thresholds, like total insured losses or specific wind speeds, and the bond gets triggered. If it does, investors can lose part or all of their money. And if the event doesn't transpire, the investors will get their money back plus interest. Chris Grimes follows the market for Fitch Ratings. He says it's too soon to know if Hurricanes Helene and Milton will trigger significant losses for cat bond investors as insurers

begin to process claims. As with other bonds, after they're issued, catastrophe bonds are traded in a secondary market. And Grimes says prices in that market initially fell by 10 to 30 percent for a handful of bonds, suggesting investors expect some losses. Typically, what happens with events like this is you see an initial markdown, and then as more clarity arises over the following weeks and months, you'll see the bond prices react to the new knowledge about the actual securities themselves.

As of this week, Artemis estimates damage from Hurricane Milton might trigger investor losses in the low $100 million. And when insurers issue new catastrophe bonds in the coming months, Grimes says they may have to pay a higher premium to attract new investors. I would expect that pricing would reflect the greater loss activity that we just experienced over the last couple of weeks. And that could be passed on to insurance customers. One reason for the

rising cost of homeowners insurance in the past few years is that reinsurance, including catastrophe bonds, has become more expensive. Cliff Rossi is an expert in risk management at the University of Maryland. He says cat bonds play an important role in stabilizing the insurance industry. But the market, as I see it today, is still not large enough to be able to keep up with the pace of extreme weather events that we're starting to see with these back-to-back hurricanes, for example. How much the cat bond market will grow depends on how willing investors are to keep risking their money

as climate catastrophes stack up. I'm Amy Scott for Marketplace. You hear stories all the time about private equity groups buying up companies in a particular industry. Media, healthcare, you name it, right? A story in the Wall Street Journal the other day caught my eye though, a new trend in private equity, pouring money into the skilled trades, think plumbers and HVAC. Tuping Chen did the reporting on it.

Thanks for coming on the show. Thanks for having me. First of all, who's getting bought up in these trades? Well, there's a lot of interest in the skilled trades, but it's especially concentrated in HVAC companies, plumbing and electrical. Who's doing the buying? A ton of folk in private equity. So you might think about private equity

as typically going after the bigger fish. This is a moment where we're seeing a lot of companies, bigger and smaller, going after companies in the skilled trades, really of all sizes. One does not usually hear though of private equity going after the skilled trades in these kinds of generally smaller companies, right? They buy the big ones, they get scale, and they, you know, take them apart and extract

profit and then they move on. What is going on here? Well, when we're talking about the home services industry, it's really fragmented. We're talking a lot of mom and pop shops, companies that were started maybe by a worker who was maybe out in the field before and started their own company and built it up. And now they've got a couple million dollars in revenue and companies that are looking to kind of build these bigger entities. What they can do is they can come in, they can build through starting with maybe one

kind of anchor company, right? A big plumbing company, and then add on lots of littler outfits and sort of roll them up. And the idea is you improve the margins, the efficiencies, you build these bigger sort of more productive entities. What is happening to these companies after they get sold or bought, depending on your perspective? I mean, do the owners stay on?

Do the people who built these companies get to participate or what happens? Well, there's really a range, of course, but something that's interesting is that in recent years, if we were talking say a decade ago, you would have seen a lot more owners of these companies who just wanted to sell, retire right off to the sunset. And what we're seeing more these days is owners who actually want to stick around and build up their companies. So a lot of them stay, do stay with the company at least for a few years. That's something that private equity likes, of course, for stability often.

Conversely, though, you do have owners who have stories about really getting told that they would be able to stay and still have authority and decision-making power and have found that that's not been the case. It's hard to generalize, but certainly there is interest often in owners to stay and often that's very beneficial to the buyers. One of the other things that's happening here though is that the landscape of these industries is changing so quickly that in your telling in this piece, the owners don't really have a choice.

I want you to tell me about Dana Spears. She's down in Florida, runs or ran, I suppose, an HVAC company. Yeah. So Dana Spears, she started building this company up and she found, as many owners did find, especially during the pandemic, that there was just increasing interest and folk knocking on her door wanting to buy her company. And she didn't want to sell. She had employees that had been with her for 16 years and she was worried, as many owners

do fear, that someone was going to come in, buy the company and essentially kick out a bunch of employees, hire cheaper ones, et cetera. And so she didn't want to sell, but eventually found really that the people around her were all selling. Eventually, she really started to feel like she was being outgunned because if you think about the folk who do have private equity come in and buy them, they end up with more money, they can negotiate better deals on equipment, fleets, things like healthcare sometimes can pay better wages.

And so for her, it was really just this feeling of this is kind of inevitable and it might not be something I want to do, but also they are offering a lot of money right now and it is an opportunity. Can we talk about customers here for a second? And I'm not saying that, you know, my local plumber, who I've been calling now for how long have I had my house? Fifteen years. I've been calling now for how long have I had my house? 15 years. I've been calling the same company for like 15 years.

What's going to happen to the service part of these service industries? Are consumers going to do better or maybe even not worse, right? Is the best to be hoped for? Yeah, that's a great question. And I think jury is still out. I will say there are certainly plenty of cases of customers who say, look, my company got sold. The company you use got sold.

And all of a sudden they're sending in service texts who don't know as much. Right. Converse, you'll talk to customers who say, my company got sold and I have faster response time. So as with everything, I mean, it's going to be something of a mixed bag. Teping Chen at The Journal talking about the skilled trades and private equity, not a combination you hear too often. Teping, thanks a lot for your time.

Interesting piece. Thank you. Coming up. There's this demographic gap between 18 and 50 year olds. They're not here. Demography is destiny, you know. First though, let's do the numbers. Dow Industrial is down 140 points today, a third of 1%, 42,374.

The Nasdaq gained 138 points, three quarters percent, 18,415. The S&P 500 picked up 12 points, two tenths percent 58 and nine. Mitchell was just telling us about the comparison between pensions and 401K plans. So in some 401K related stocks, Tiro Price found two and three tenths percent today. Bank of America, which if you remember the financial crisis, owns Merrill Lynch,

pocketed seven tenths percent to Boeing, whose workers want pensions instead of 401K, is down 1.2 percent today. Tesla, the EV maker reported revenue of more than $25 billion yesterday. Earnings are forecast to rise this year. Tesla sped up 21 and 9 tenths of 1 percent. Bonds up yield on the 10-year T-note down 4.21 percent. You're listening to Marketplace. This podcast is supported by Fundrise. Buy low, sell high. It's a simple concept, but not necessarily an easy concept. Right now, high interest rates have crushed the real estate market. Prices are falling and properties are available at a discount, which means Fundrise believes now is the time

to expand the Fundrise flagship fund's billion-dollar real estate portfolio. You can add the Fundrise flagship fund to your portfolio in minutes by visiting fundrise.com slash smart. That's F-U-N-D-R-I-S-E dot com slash smart. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. Hey everyone, I'm Rima Grace, host of This Is Uncomfortable, a podcast from Marketplace

about life and how money messes with it. It's hard to believe, but we are somehow in our 10th season of the show. To celebrate, I sat down with the founding producer and we chatted about everything from the early days of the show and the terrible titles we almost named it, to what we've learned making This Is Uncomfortable. You'll also hear our favorite money tips from expert guests and how the show has helped some listeners make dramatic changes in their lives. You can hear this special episode of This Is Uncomfortable wherever you get your podcasts. episode of This is Uncomfortable wherever you get your podcasts. This is Marketplace. I'm Kyle Rizdall. The Census Bureau told us this morning sales of new homes in this economy are doing pretty well, the best in a year and a half in September.

Used homes, existing homes is the preferred phrase, not quite so good. Data out yesterday from the National Association of Realtors, we mentioned this, those sales in September the lowest they've been in 14 years. That said, there was some anecdotal hope for our housing future in the Federal Reserve's beige book also out yesterday. The Fed noted housing inventory is expanding across the country, and the Richmond Fed in particular cited an agent in Virginia who was specifically seeing a rise, and this is a quote, a rise in fixture uppers and less than ideal homes entering the market. Marketplace's Stephanie Hughes is on housing for us today.

The house that Caritas stalls renting right now in Baltimore has some issues. Take the toilet in its only bathroom. It's never been good at flushing. We often have to bucket flush on top of regular flushing. Stahl is a special education teacher and a single mom with four sons at home. The house, busted toilet and all, is about to go on the market. And Stahl is hoping to buy it, even though she says she's not really the fixer-upper type. I have to find a place for us to be in that is a fixer-upper in this market. Homes that are probably livable but need giant helpings of TLC haven't been of much interest

to buyers since the pandemic. That's according to Jonathan Miller, who leads Miller Samuel, a real estate appraisal and consulting firm. Buyers have wanted what they wanted and right away. Immediate gratification wasn't fast enough. But Miller says now there aren't enough houses on the market that are move-in ready. And so I would think that the fixer-upper market is there's a little bit more supply than we would typically expect.

Meanwhile, the median price for an existing home was up 3% from last year in September. The 15th consecutive month of year-over-year increases. That makes people more willing to deal with a toilet that doesn't flush. Nadia Evangelou is a senior economist with the National Association of Realtors. Many buyers are turning to homes that need renovation as a way to enter the market at a lower price point. But Evangelou points out the cost of renovating has surged in the past few years. Prices of building materials have gone up, as have wages for people who do the building.

It may look like a better solution to fix our upper, but sometimes when you don't add the renovation cost, then it can go over the budget. And we have seen that many times as well, personally speaking as well. Evangelo bought her house in Virginia in 2018. She did some interior work right away, with a plan to fix up the outside eventually. She says six years later, those fixes are still waiting. I'm Stephanie Hughes for Marketplace. Now, a story about another kind of fixer-upper, a small business that's getting new life in San Luis, Colorado, near the New Mexico border. The R&R Market first opened in 1857.

It is that state's oldest continuously run business. About 600 people live in town, and the market was the kind of place you could pop in to buy a cold soda or a birthday card, bump into a neighbor, talk about the weather, what have you. Ownership had been in the same family till just a couple of years ago when a local nonprofit bought the old adobe building.

And with new management, of of course has come a new vision and a new name the san luis people's market colorado public radio's dan boys toward the renovations the original wall of the market in san luis is made up of exposed earthen bricks that date back 167 years you see see those cracks? The building wears its history. There are scorch marks from a fire in the 1940s. Scratch it and smell the burnt ash. That's De'Von Pena, a college professor and the store's new executive director. He's a stocky man wearing a black ball cap that reads,

San Luis People's Market. We gotta clean that up so we can plug these holes up, cut the ancient sewage pipes, which are non-functional. The old market was a general store that sold some limited groceries and hardware. Now, the building needs a lot of work before it can get up and running again. It has seen better days.

That's actually true of much of this little western town. Market general manager Lynette Ramirez points out many San Luis buildings are in rough shape. It feels good to be one of the first buildings brought up to standards now that may continue another 167 years into the future. San Luis is Colorado's oldest town and has a rich agricultural heritage, but the population is shrinking and aging. The last family owners of the market retired in 2022 and had no family who wanted to take over.

So Pena bought the place with the help of about $3 million in grants and private funding. He wants the market to become a community tentpole. You can't sustain a business model unless you become a destination. The San Luis People's Market will be a food co-op with the sort of fare the old market never had, like roasted chicken from a brand new rotisserie. Because there's never been one in town and everybody would love one. Fresh soups with local ingredients, salad greens and herbs from a greenhouse out back.

And Ramirez hopes the store's shelves will be stocked with produce raised by the community who would share in the profits. So if we can get them producing food, even a little bit that can be sold into the market, then I won't have to order it from another state. It's a grand vision, but one that requires employees. And working-age people are kind of hard to come by

in this remote, high desert region. Pena calls it his next-generation problem. And that's the one that's got us a little bit stumped. There's this demographic gap between 18 and 50 year olds. They're not here." He's trying to solve that through paid internships. Three local high schoolers are washing baskets of produce. They're working out of another local building until the market reopens this fall. They're learning how to prepare salads and prickly pear cactus ice cream to serve at a community dinner.

We've learned foods I can't even pronounce, foods I never even heard of. 16-year-old Safira Rael holds up some purslane. It's a small succulent. Pena and Ramirez have had them growing crops like this from seeds and then making dishes infused with indigenous and Hispanic tradition. It's not even Spanish, Richard! seeds and then making dishes infused with indigenous and Hispanic tradition. I ask Raelle if learning to farm these heritage crops and learning to prepare these culturally rich meals, if that makes her want to stay and be part of the San Luis people's market. Well, it depends. As of now, Raelle wants to get out of San Luis, see the world.

I want to go be a traveling nurse or a flight attendant with my cousin. But hey, she has a couple years of high school left. And in that time, Peña is hoping a revitalized old market becomes a new centerpiece in town, maybe part of a local farming movement. Something worth sticking around for. In San Luis, Colorado, I'm Dan Boyce for Marketplace. This final note on the way out today, I'm off the show tomorrow traveling to Boston for an event at WBUR, but we've got a piece airing on Monday that I wanted to do a little preview of, a story on the Federal Reserve and the politics of this economy.

I went to Harvard last month to visit Daniel Turullo, now on faculty at Harvard Law. But before that, he was a member of the Fed Board of Governors. I couldn't help but notice as I was getting ready to come talk to you that you're teaching a seminar this fall at the law school. It's called the Federal Reserve Legal and Policy Issues. Students may, as it happens, complete a research paper

that would satisfy the analytical paper requirement at the Harvard Law School, so they've got that going for them. A theme running through the course, quoting here, will be the impact of the financial crisis of 2007-2009 in reawakening political controversy over the Fed's operation and functions. It is, you say, the nation's central bank, and it is also statutorily and customarily independent. Why are you teaching that course? Oh well there are a couple of reasons, I guess three reasons probably. One, not surprisingly I'm interested in it having been on the Fed. Two, the students are incredibly interested in it. I mean I've been

frankly surprised at the length of the waiting lists, but that probably derives from the third reason, which is because of the financial crisis, because of issues around banking regulation, because of the reappearance of inflation over the last few years, it's become front and center again in public debate in a way that it really wasn't for a while during the Greenspan period. Interestingly, you didn't say anything about the politicization of the Fed right there. Well, I don't think the Fed has been politicized

within the Fed, and that's one of the things that I value about the Fed still, because in a period in which partisan divide is so sharp, the Fed is able to put together a consensus position that has some staying power. And that's regardless of whether Democrats or Republicans have appointed the various members. The members of the Board of Governors

come in with different views and they maintain different views, but it is an institution which continues to operate in a fairly collegial manner in which things are debated back and forth seriously and which people try to come to a position which is good for the country, but also can have some durability so that you don't get these sharp swings that we see in areas like environmental policy. Much more on the Fed and its political independence coming up on this program on Monday. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Peetra and Stephanie Sieck

are the Marketplace Editing staff. Amir Bibawe is the Managing Editor. I'm Kyle Rizal, we will see you tomorrow everybody. This is APM. Hey everyone, I'm Rima Grace, host of This Is Uncomfortable, a podcast from Marketplace about life and how money messes with it. It's hard to believe, but we are somehow in our 10th season of the show. To celebrate, I sat down with the founding producer and we chatted about everything from the early days of the show and the terrible titles we almost named it to what we've learned making This Is Uncomfortable.

You'll also hear our favorite money tips from expert guests and how the show has helped some listeners make dramatic changes in their lives. You can hear this special episode of This Is Uncomfortable wherever you get your podcasts.