Pension Freeze: When You're Left Out in the Cold
More companies are opting to halt pension activity.
When some of the country's biggest employers and industry trade associations pleaded with Congress for temporary funding relief, several key unions and employee groups supported their request, hoping it would prevent companies from freezing their pension plans. (A pension freeze means employees keep the retirement benefits they have already earned but do not accrue any further benefits. That minimizes employers' future costs, but it doesn't relieve them from having to make up current shortfalls in the plan's funding.) But pension freezes seem to be picking up steam since last year's stock-market meltdown.
More than a dozen major corporations, from telecommunications giant Motorola to publishing icon Random House, have announced pension freezes effective this year. Because a freeze reduces future retirement benefits for employees, companies often introduce a new 401(k) plan or enhance their existing plan by boosting employer contributions.
That can be a boon for younger workers. Most of them probably wouldn't stick around long enough to benefit from a traditional defined-benefit plan, which typically generates the greatest benefits toward the end of a long career. And older workers nearing retirement are often unscathed by pension freezes because they have already accrued the bulk of their benefits, which are based on a formula that includes years of service and the average of your highest three or five years of salary.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But for mid-career workers in their fifties, a pension freeze can be devastating. Future raises and years of service won't be factored into their pension calculation, causing them to miss out on the most lucrative part of the back-loaded retirement benefit. And they have less time to make up the loss by saving in a 401(k).
For example, the Center for Retirement Research at Boston College found that a pension for an employee who joins a company's pension plan at age 35 and continues to earn benefits until he retires at 62 would replace about 43% of his final earnings. But if the pension is frozen when the employee is 50 and replaced with a 401(k), the worker's retirement-income replacement rate drops to just 28% of final earnings. Even with 401(k) enhancements, retirement benefits decline.
In both cases, Social Security benefits would supplement retirement income. But the worker whose pension was frozen would have to rely more heavily on personal savings to maintain his preretirement income or cut expenses after he leaves his job. Plus, the investment risk shifts from employer to retiree.
What can you do? Financial planner David Kudla says you should focus on the things you can control, such as contributions to your 401(k) and other personal savings. Although he sympathizes with retirement savers who may want to walk away from the stock market forever, he says that's "wrong thinking at the wrong time for long-term investors."
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Dow Outperforms After IBM Earnings
Investors also parsed a strong reading on second-quarter GDP and a dismal decline in durable goods.
By Karee Venema Published
-
Try the 6 to 1 Grocery Shopping Method to Save Time and Money
The 6 to 1 Grocery Method can help you save money, reduce waste and eat healthier.
By Erin Bendig Published
-
Medicare Basics: 11 Things You Need to Know
Medicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
By Catherine Siskos Last updated
-
Six of the Worst Assets to Inherit
inheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
By David Rodeck Published
-
403(b) Contribution Limits for 2024: Good News for Teachers
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Last updated
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Last updated
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Last updated
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The SIMPLE IRA contribution limit increased by $500 for 2024 and workers at small businesses can contribute up to $16,000 or $19,500 if 50 or over.
By Jackie Stewart Last updated
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Last updated