Defined Benefit Pension Plans Decline

It’s no secret that defined benefit pension plans are no longer offered to as many employees as in the past.

In fact, there is a good chance that you do not have a pension plan from your former employer, or if you are currently working you probably are not given a pension plan option from your current employer.

There are a couple of reasons pension plans have declined in popularity:

  1. Costs – There are only one-hundred pennies in a dollar. When the costs of other retirement benefits, such as health insurance, go up, then the employer must cut back on other benefits, such as a pension plan. The cost factor is one of the biggest reasons employers are reducing their exposure to pension plans.
  2. Risk – Less employers today want to be on the hook to make sure their promised pension funds are adequately funded to support a specific defined benefit for its employees. If the investments in the fund go down, the employer is still on the hook to pay out the defined benefit it promised to its retired employees. It is no surprise that many employers want to get away from this responsibility.
  3. Mobile work force – Americans today do not stay put. They job hop. If you don’t stay at one employer for a significant amount of time, your pension with that employer probably won’t be that big. So in a way, a more mobile work force has made the defined benefit pension a much less appealing perk.

What Does This Mean For You?

As more and more employers shed the responsibility of a defined benefit pension plan, the responsibility must fall somewhere else. And guess where that is.

It’s on your shoulders.

Now retirees must bear the burden of making sure their nest egg lasts them through their retirement years. This is not an altogether bad thing. Ask yourself these two questions:

  1. Would you rather be in charge of your finances, or would you rather have your retirement income dependent on your former employer’s ability to keep the pension income flowing your direction?
  2. Would you rather have a lump sum in a 401K that you can take with you upon retirement, or would you rather have no lump sum but instead have a promise from your former employer to pay you a monthly income?

We’re already seeing pension promises being broken today. This is playing out with city of Detroit bankruptcy proposals that cut retired employees pensions. 

You can see it with Bethlehem Steel pensioners as well

There are more examples that could be used.

Some retiree benefits were real sweet-heart deals that gave former employees a great retirement. Both in terms of retirement income, as well as retirement health benefits. The problem with sweet-heart deals is that often times they cannot be maintained forever.

Call me crazy, but I think I’d rather have access to a lump sum. Then I would be in control of what I do with it. That’s essentially what a 401K plan is all about. It’s yours. You can roll it into an IRA when you retire. The options available to you as far as investing go are tremendous. If your former employer goes bankrupt, your 401K funds are now sitting nicely in your IRA.

But there is a downside to all this. Now that defined contribution plans (like 401k’s and 403b’s) are more common, the financial responsibility of taking care of retirement is falling more and more on the shoulders of retirees. If you plan properly for retirement this shouldn’t be a problem. If you do not plan properly for retirement, you may have some problems.

What it means for today’s retirees…

What this essentially means is that retirees must take steps to plan for their retirement. The 401k is probably going to be most people’s avenue to growing their retirement funds. Here are 4 tips to help you grow your 401k.

  1. Free money – Take advantage of all the company match your employer will give. If the employer matches 50% of the first 6% you contribute, that means they just gave you a free 3%. That would equate to 9% of your annual salary going into your 401k each year. If you don’t take advantage of this, you are leaving free money on the table.
  2. Diversify your 401k – A diversified portfolio is a good idea. This means having exposure in different asset classes, like stocks, bonds, real estate, commodities, etc. Don’t be too conservative with your investments. Being too conservative can be a risky thing because you have less growth potential to build your nest egg for retirement. But you also don’t want to be so aggressive that you can’t stomach the ups and downs. Diversification helps smooth out the ups and downs of the market.
  3. Catch Up Provision – If you are under 50 the max you can put into your 401k is $17,500 (for the year 2014). But if you are over 50, and your 401k plan allows you, you can put an additional $5,500 in (for 2014). Assuming you retire at age 65, you could have an additional 15 years of using the catch-up provision.
  4. Review annually – It seems most people treat their 401k like a “set it and forget it” strategy. But you need to check it annually at least. Asset allocation is important to your portfolio. As certain sectors of the market grow at a different pace from other sectors, you may find that you need to re-balance your portfolio at the end of the year. This would be done to keep your allocation in line with your goals and risk tolerance.

Need help or a little guidance on your 401k?

The decline in popularity of the defined benefit pension plan has put more responsibility on the shoulders of retirees. They must now take steps to manage their investments, and/or find a professional that can help them.

If you have questions about your 401k or 403b feel welcome to reach out. I try to respond to comments as quickly as possible. I’ll do my best to point you in the right direction. You can leave a comment below, or you can email me if you feel more comfortable. My email address can be found here.

Best,

Chris