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Today's Commentary: 11.03.04
Surviving Your Pension: Five Steps Toward an Uncertain Retirement
It seems that these are no longer the days of wine and roses. Resembling more the nightmare of whines and losses, the average employee is not as prepared for the future as one would imagine. Plans that have been made for retirement are being unwound in every sector as business after business uses a loop hole left in a 1984 Congressional amendment to the pension law. That gaping hole is changing the way Americans think about their golden years.
So what can you do to alter the outcome of this impending disaster? Plenty although many of them are not all that savory. Here are five steps you can take to alleviate an uncertain future, a retirement that you probably thought was as sure as daybreak.
First, lets take a look at how we arrived at this problem. That pension law I mentioned earlier had its most direct effect on companies who use the defined-benefit plan. This type of plan is funded by the employer with the calculations determined in either of two ways. One is calculated based on a percentage of current pay creating an annuity payment for the retired employee; the other is the one time payment to the employee which is then rolled over to another type of retirement account. The former one is based on an actuarial percentage. The later is usually based on an interest rate assumption coupled with a mortality table.
Add to this, the attractiveness of early retirement with full benefits or what is referred to as an early retirement subsidy and those golden years look particularily tempting. This type of pay-out tends to work for the benefit of both parties. The worker, usually blue-collar may have a predictable prime working life that fades before they reach 65. If the employer can ease the worker out of the workforce prior to this happening, both parties benefit. This is when Congress stepped in, amended the law and in doing so, allowed companies to search for other means to end this practice that, because of the rapid decline in market returns left companies worried about their ability to fund these promises.
Finding the loophole they needed, many companies sold pieces or divisions of their companies and in the process, cut the tether the company had with the employee. This sounds like a harsh way of reclaiming millions of dollars in pension money, but the practice has become widespread.
Of course, concessions can be sought in the public forum as many airlines have found. Asking pilots, who are by law forced to retire at 60, to take pension cuts to allow the company to stay afloat, are now part of the bargaining tool used by far too many companies. This trend of dismantling the employee's retirement hopes and the often hard-worked-for-dreams.
How do you protect yourself from this happening to you?
The first thing to remember is diversification. Do not make your pension, if you have one, the only part of your retirement picture. Fully relying on it for retirement income, much of it estimated on yearly statements may be a foolish undertaking. While extreme cases of pension elimination will happen, they usually can be avoided through due diligence. That diligence may require you to read the pension plan fully each time it is published.
Thanks in part to the Bush administration's Economic Growth and Tax Relief Reconciliation Act of 2001, companies found another more insidious loophole. Language that changed in pension plans during one year can make a company's eventual sale or merger into a larger firm much more attractive. Pensions come with an often staggering cost and can impede the sale of a company. Employees of the old firm often found their more lucrative plans rolled into the parent company's plan at a reduced benefit because they had, in essence, resigned from their old company. Even if that did not happen.
Defined benefit plans have performed better, over the long run than defined contribution plans such as 401(k) plans. In the table below, you will see, during a decade long snapshot that captured the turbulent decline in the market in 2000 and 2001, that the defined plan did better than 401(k) plans.
Much of the reason was professional management and the fiduciary responsibility of that management to diversify those investments. Self direct plans such as 401(k) plans, leave much of that decision making to the employee, a major shift in how retirement funds are grown.
But many companies have shifted these benefits to defined contribution plans and the table below will tell the tale of how these plans alone may not be enough to offset company sponsored plans.
If your company has a pension plan and offers something in the way of a self directed plan, take advantage of it. In many instances, you can find exactly the payroll percentage that does not effect your take home pay. Because these self directed plans involve pre-tax income, changes in take home pay often are not affected by as much as a 10% deduction. These plans however, if you have them, should be much more aggressive in their investments than your pension plan is.
The second most important thing you can do is pay attention. The Bush administration made some changes in unqualified pension plans that will take effect on 12.31.2004. Because of the American Jobs Creation Act (H.R.4520), the pension you may have known has changed and some of those changes should be noted.
For instance the act permits distributions only in the following circumstances:
The participantıs separation from service, as that term will be defined by the Treasury Secretary. ³Key employees² (as defined by the top-heavy rules for qualified plans, generally the top 50 paid officers) of publicly traded companies must wait six months after their separation from service to receive distributions.
The plan participantıs death or disability
A change in ownership or effective control of the corporation or a change in the ownership of a substantial portion of the corporationıs assets. These terms will also be defined by the Treasury Secretary and will be similar to those used for golden parachute purposes.
At a specified time or according to a fixed schedule, as specified when the compensation was deferred
vAn unforeseeable emergency, based on rules set forth in the act
If these changes are mishandled by the company and the long term effects could be devastating. Expect some sort of plan communication from your pension. Those changes should be seamless and if at all possible take into consideration the costs that could trickle down to the plan participants. Those costs could range from taxes and interest to penalties. Efforts should be made to "grandfather" old plans with newer plans if needed. It is preferable to freeze the old plan when starting a new plan but the language in the new law is very broad. Pay attention to any changes and ask if you haven't heard of any significant amendments to the plan. These will be done by the company in part because of the huge savings in contributions they will get because of the law. This particular legacy against the American worker will live on long after Bush leaves office.
Three, four and five are the old standbys of any good financial plan and have been mentioned here numerous times. But they bear repeating.
Get a firm hold of your debt situation. Any debt you carry into your retirement acts like a tax on your income. Without any real knowledge of how long you might live, each dollar spent on interest to finance that debt will take precious money from an unknown future.
Do your best to stay healthy now while you are working. Offsetting any health issues now can mean dollars saved for the future.
And increase your savings. We don't save enough as a nation and that will eventually come back and bite us. And that may happen sooner than later.
It is unfortunate that these events are happening in corporate America and doubly unfortunate that the last four years have facilitated those changes. Companies have used pensions as profit centers until they no longer proved a well spring. Because of clever jurisprudence, participants who may have been relying on and looking forward to those payouts from years of hard labor and loyal service may not get what they expected. If those benefits are even there.
At Arm's Length: 10.25.04
Now consider the U.S. position on the international front. We have given our best effort at trying to shape international monetary diplomacy, suggesting that selling our spend-spend lifestyle to overseas investors is a good investment for all concerned.
The Blue Money Report
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