Wednesday, June 24, 2009
Retirement. First off, I know most of you think you're way too young to be thinking about that right now. But like it or not, it's going to be that time eventually - and you need to be prepared.
A recent article by Forbes discusses the past, present, and future of private defined-benefit pensions (i.e. you get X amount per year post-retirement, no matter how long you live). According to Pensions & Investments, the top 100 corporate pension plans dropped funding by about 30% in 2008. That is, between 2007 and 2008, these plans began with a surplus of over $110 billion and closed 2008 with a deficit of almost $200 billion. The U.K. has also experienced similar cut backs over the past year.
The underfunding, and its related costs, is accelerating the demise of private defined-benefit (DB) pensions. In the U.K. and U.S. this could spell the end for this once-dominant pension institution.
Pension Benefit Guarantee Corp.-insured private-sector DB plans have been in decline since the 1980s; as of 2007, U.S. companies sponsored around 30,000 DB plans, down from over 114,000 in 1985. This trend seems to be accelerating. The majority of Fortune 100 firms now only offer new employees defined-contribution plans. According to Watson Wyatt, a consulting firm, this is the first time that has happened.
Although they provide more flexibility, defined-contribution plans do not predetermine or guarantee the income which they will provide - possibly exposing workers to greater market volatility. But this trend doesn't appear to be changing anytime soon.
In a 2008 report, the Government Accountability Office suggested that most U.S. firms freeze their DB plans due to cost considerations and the volatility of plan funding. Given both have just increased, there is widespread expectation that pension plan freezes and terminations will accelerate.
In the current labor market, most employees won't work 3 years at the same company, let alone 30 years. Therefore, you need to take advantage of privately-managed investments and retirement accounts. It's never to early to start, and the reality is that defined-benefit pension plans likely won't be an option for most employees.
Read the rest of the article here.
Posted by Brad Karsh on June 24, 2009 at 09:49 AM
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