Defined Benefit Pension Plans

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Statistics show that individuals with pension plans have more disposable income during retirement years. Recent changes in pension planning are likely to affect this – leading to less income – unless individuals take more control over their retirement. Many companies have eliminated their defined-benefit plans, have reduced the value of their benefits, and are shifting the responsibility for pension savings to the employee.

The simplest definition of a defined-benefit plan is that it provides a guaranteed fixed monthly income to retirees. But it’s not always that simple. It’s governed by federal law, rules of the company administering the plan, policies of the investment companies involved and the needs of the employer. In the past, employees worked for the same firm, often for their whole career, with the expectation of having a guaranteed income when they retired.

Cases like Enron show how complex the financial affairs of major companies can be. Everyone blames everyone. So far many individuals and companies have gone to trial. People are in jail and fines are due. The pensions of their employees are lost forever. It’s understandable that companies are shifting the responsibility for retirement savings to the individual employee. It’s disturbing to think that employees might not do any better unless they change their approach to retirement planning.

It is my opinion that the biggest problem individuals have is relying on someone else to take care of them. Even as we shift our emphasis from employee pension plans to our own retirement plans, we still don’t seem to understand that our financial future is totally in our hands. We put money into a 401 and expect it to grow. We complain when the market does poorly. It’s the company or the market that caused us to lose money. But have we done all we can to learn about the different investment methods and our individual choices?

What changed the most are guarantees. Consumers need to adopt the attitude that very little in life is guaranteed. The more control we give to others, especially with our finances, the less control we have. There are advantages to working with your employer. One good example is employer matched contributions, but we need to be more aware of what we’re actually doing rather than just picking on option on the enrollment form.

Individuals, just like companies, can make mistakes. Investing money always involves some degree of risk. Common sense tells us that no one else or no company has the interest in your financial affairs and future success that you do. You, not the company, have the most to gain or lose. For that reason alone, each employee should make the commitment to be more involved in their pension planning.

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