Corporate pension plans have been undergoing a massive change in the last twenty to thirty years. What used to be the most common form of retirement program in the U.S. has been supplanted by the ever-popular 401(k) plan. The reason is simple: employers are shifting the burden of retirement from their company to the individual. Instead of funding a pension plan, which rewards a career of service with a lifetime of payments when a retiree reaches a certain age, companies are funding 401(k) plans, which place the employee in control of his or her financial future.
The new trend—frozen pension plans. Two mainstays of corporate America, General Motors and Bank of America, recently announced they were freezing their pension plans. When a company freezes its pension plan, they generally don't shut it down completely. Instead, they stop contributing for current employees, don't accept new employees into the plan, or both. Members are still able to receive the pension plan benefits they have earned, they just won't accrue additional benefits. To make the bitter pill easier to swallow, some companies will increase their 401(k) plan contributions when they freeze their pension plans, as was the case for GM and Bank of America.
What do these changes mean for you? This trend puts more responsibility on employees to take care of their retirement planning. In a way, this is good, because it gives individuals more control over their retirement. Using an IRA or 401(k) for your retirement plan also gives you the benefit of portability, allowing you to take your retirement plan with you wherever you go. But there are significant downsides. Employees lose out on a guaranteed retirement income source and are forced to make their own retirement contributions.
If you’re fortunate enough to still have access to a traditional pension plan, here’s how to make the most of it:
Join immediately. Some companies still offer pension plans. If your employer provides a pension, you should opt into yours as soon as you are able to, even if you don't anticipate working there for your entire career. Your contributions will still belong to you, even if you leave the company at a later date, giving you additional retirement savings.
What if your company freezes its pension plan? A few years ago I worked for a Fortune 500 company, which had a pension plan. I contributed a small percentage of my paycheck (after tax) toward the pension, which my company matched. Unfortunately, the company froze their pension plan system while I was working there. I would still be able to become fully vested in the plan, but I wouldn’t be able to accrue additional income. When I left the company, I was able to transfer my pension plan contributions to a Roth IRA without losing any tax benefits or paying any fees. This gave my retirement savings a boost.
What if your pension plan or company goes bankrupt? You will need to contact the Pension Benefit Guaranty Corporation, a federal agency that insures private sector pensions. You may still be able to receive some or all of your pension benefits through this government insurance program.
Continue saving for retirement on your own. I contributed to a Roth IRA and my 401(k), even though I had a pension plan with my former company. My pension plan contributions were only a small percentage of my salary, and it would have taken years to accrue a meaningful nest egg and become fully vested in the matching contributions. Investing in my own retirement plans gave me more control over my future, and allowed me to stash more money away for retirement.
Pension plans are a great benefit if you have one, but losing out on one doesn’t mean you won’t be able to retire. It just means you need to take control and be diligent with your investments.