The Vanishing 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 large company or an agency of their state or federal government, and work there for 30 or 40 years. They would buy a house, pay for it, and retire with a guaranteed income and health insurance for the rest of their lives. For most Americans, this is a vision of the past.

Over the past decade, thousands of US companies and institutions have abandoned their defined benefit pension plans in favor of unguaranteed defined contribution plans such as 401(k)s and 403(b)s. With an aging workforce, such a move has allowed companies to save large amounts of money by eliminating the obligation to fund large pension obligations, particularly in times of falling interest rates and a volatile stock market. According to Edward Wolff, economics professor 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 own 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 access this money when they change jobs or retire. Despite attending occasional employer-sponsored educational workshops, defined contribution plan providers generally do not provide investment advice, leaving the employee to make important investment decisions on their own. People find themselves responsible for managing their greatest asset and making sure it lasts for the rest of their lives.

With interest rates at their lowest point, major swings in the stock and commodity markets, mounting inflation pressures, and ever-increasing health care costs, what’s a person to do? When one reaches the preservation and distribution phases of the life of the investment, it is critical that one’s investments be structured in a way that minimizes or eliminates portfolio losses and positions one’s portfolio for guaranteed income streams that cannot be outlived. . With more than 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 plethora of options for people to create their own pension plans. “guaranteed”. The structuring of these guaranteed income streams should be done with the help of a qualified financial professional, such as a registered investment adviser.

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