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April 10, 2006
Why Are Healthy Companies Freezing Pension Plans?
In the past, the only companies that shuttered pension plans were those that were in the throes of, or trying to stave off bankruptcy. Increasingly, that is no longer the case. Healthy companies with ell funded pension plans are freezing those plans and replacing them with defined contribution plans.
Already in 2006, Coca-Cola, Nissan, IBM and Alcoa have frozen their plans. In 2005, Verizon, Sprint, Lockheed Martin, and Hewlett Packard, among others, did the same. A new brief by the Center for Retirement Research looks at why these healthy employers are freezing their pension plans and the impact on American Workers.
The brief offers four possible explanations:
The first is that some U.S. companies are cutting pensions to reduce workers’ total compensation in the face of intense global competition. The second explanation is that employers have been forced to cut back on pensions in the face of growing health benefits to maintain existing compensation levels. The third explanation, by contrast, points to the finances of the plans themselves — specifically, their market risk, longevity risk, and regulatory risk that make defined benefit pensions unattractive to employers. The final explanation is that with the enormous growth in CEO compensation, traditional qualified pensions have become irrelevant to upper management who now receive virtually all their retirement benefits through non-qualified plans. Each of these explanations contains a kernel of truth, and they all help explain the current trend.
The report concludes:
This change has an immediate adverse effect on mid-career workers, and, even though younger workers do not recognize it, the shift will probably mean that many young workers will end up with an inadequate retirement income. For, while 401(k) plans are fine in theory and could even be superior for the mobile employee, they transfer too much of the responsibility to the individuals and individuals make mistakes at every step along the way. Median 401(k)/IRA balances in 2004 were only $35,000 in 2004 according the Federal Reserve Board’s most recent Survey of Consumer Finances.
There are more than enough explanations for the new trend. A desire to control compensation costs, the pressures of rising health care outlays, the confluence of economic, demographic, and regulatory risks, and the emergence of a two-tier pension system all make the sponsorship of defined benefit pension plans relatively unattractive. Moreover, the genie is out of the bottle. Given that the employer-sponsored pension system is a voluntary arrangement, nothing is likely to stop other healthy companies from following suit and closing down their defined benefit plans.
I highly recommend you read this report if you are expecting a pension plan to fund any portion of your retirement.
I am curious how many of my readers have been affected by pension plan cuts? Please chime in, whether you have been affected or not. As always, you can leave your thoughts and comments below.
SOURCE:
1. Munnell, Alicia H., Golub-Sass, Francesca, Soto, Mauricio and Vitagliano, Francis. "Why Are Healthy Employers Freezing Their Pensions??" An Issue In Brief: Center for Retirement Research at Boston College, March 2006: Number 44.
http://www.bc.edu/centers/crr/ib_44.shtml
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Trend: Individuals must assume more responsibility for retirement savings as corporations reduce benefit expenses. Kim Snider summarizes the new brief by the Center for Retirement Research focusing on healthy companies freezing pension plans. Link: Kim... [Read More]
» Why Are Healthy Companies Freezing Pension Plans? from Trends I'm Watching
Trend: Individuals must assume more responsibility for retirement savings as corporations reduce benefit expenses. Kim Snider summarizes the new brief by the Center for Retirement Research focusing on healthy companies freezing pension plans. Link: Kim... [Read More]
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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