The Disappearing Pension Plan: Identifying the Risks and How to Avoid Them


Once upon a time, the American Dream was pretty simple to quantify. A person would get a high school or college education, get a job with a big company or an agency of their state or federal government, and work there for 30 or 40 years. They’d buy a home, pay it off and retire with guaranteed income and health insurance for the rest of their lives. For most Americans, this is a vision of the past.

Over the last decade, thousands of US businesses and institutions have dropped their defined benefit pension plans favouring non guaranteed defined contribution plans such as 401(k)’s and 403 (b)’s. With an ageing workforce, such a move has enabled companies to save vast amounts of money by eliminating the obligation of funding significant pension obligations, particularly at times of declining interest rates and a volatile stock market. According to Edward Wolff, professor of Economics at New York University, “things are not looking good for retirees with the collapse of defined benefit plans. It was a piece of the puzzle that was keeping retirees afloat. In 20 years, the only people with these plans will be government employees”.

This trend has forced employees to become their money managers. Unfortunately, the average worker is woefully unprepared for the responsibility of such a task. Most 401(k) and 403(b) plans limit the investment selections available to plan participants. With few exceptions, an employee can only gain access to this money upon changing jobs or retiring. Despite attending occasional employer-sponsored educational workshops, defined contribution plan providers typically do not provide investment advice, thereby leaving it to the employee to make significant investment decisions independently. People find themselves responsible for managing their most important asset and ensuring it lasts for the rest of their lives.

With interest rates at an all-time low, huge swings in the stock and commodities markets, the growing pressures of inflation, and ever-rising health care costs, what is a person to do.? When one reaches the preservation and distribution phases of one’s investment life, one’s investments must be structured in a way to minimize or eliminate portfolio losses and position their portfolio for guaranteed income streams that cannot be outlived. With over 10,000 baby boomers turning 65 every day, the insurance industry has recognized the challenges inherent in the new economic reality we live in and has created a slew of choices and options for people to develop their own “guaranteed” pension plans. Structuring these guaranteed streams of income should be done with the help of a qualified financial professional, such as a Registered Investment Advisor.
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