2 Reasons Companies Don't Offer Pensions Anymore

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  • Pension plan administration is complicated compared to other retirement vehicles.
  • With a defined benefit plan, risk lies with the employer, not the employee.

Fewer Americans than ever before can rely on a pension plan.

How many people do you know with a pension? If you're in the United States, the answer is likely very few. Across the private sector, defined benefit plans, including pensions, are on the decline. While in the 1980s about 60% of Americans had access to pension plans, that number has dropped to 14% today. Why are pension plans going extinct? Read on to find out.

Pension plans are complex

A pension plan is considered to be a defined benefit plan because, to an employee, the monthly payment, or benefit, is defined by the plan. This means that regardless of investment returns, an employee can expect to receive no more or less than what the plan specifies. How much benefit an employee qualifies for is usually determined by average monthly earnings and length of time spent working for the employer. To guarantee this benefit, an employer must consider investment returns, aggregate plan participant benefits, and even actuarial projections, then contribute according to estimates.

Alternatively, employers could elect to take the guesswork out of retirement saving by offering a defined contribution plan, such as a 401(k) or a 403(b). Defined contribution plans offer employees the benefit of guaranteed retirement account contributions, such as an employer match, that an employee can fund retirement with. With significantly simpler administration, it is no wonder that private employers are ditching defined benefit plans, including pensions.

Risky business

With defined benefit plans, employees don't need to worry about market volatility and investment returns. However, for employers seeking to fund benefits for potentially tens of thousands of employees and their families, investing is a must. Typically, pension plans invest conservatively, in ways that hedge losses in the event of a downturn in an asset class. However, today's market conditions show why that can be a risky move, with both equities and bonds slipping. Overall, when millions of dollars in pension assets are at stake, market risk is a serious consideration for pension plan administrators.

Defined contribution plans, however, put the risk in the hands of the employee. By giving a matching contribution, an employer can help fund their employees' retirement without playing in the market. Meanwhile, the employee's benefit increases or decreases with their investments, over which the employer has zero control or interest.

How to supplement retirement

As an employee without access to a pension, how can you gain more faith in your post-retirement income?

Many Americans contribute only enough to their 401(k) to gain their employer's match. However, it is unlikely that such a low rate of savings will be enough to fully fund your retirement lifestyle. If you have excess cash flow every month, consider gradually increasing your 401(k) deferral amount. Many employers offer automatically increasing 401(k) contributions by a percentage every single year, which can help keep your contributions up while your earnings increase.

Also consider where you are saving for retirement. Traditional and Roth IRAs act as retirement savings vehicles without being tied to your employer. Although contribution limits are low compared to 401(k) limits, IRAs can offer additional tax-advantaged savings opportunities that can add up over time.

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