Pensions: The Big Chill

Brrrr. That nip in the air is from frozen pension plans across America. Companies big and small that once guaranteed generous checks to retirees are capping benefits at whatever you've earned so far. Many are also closing their pension plans to new hires. Although General Motors just announced such a move, for the most part these are not sick companies in floundering industries. For example, Alcoa, IBM and Verizon recently announced freezes. The realities of a competitive business climate and a mobile workforce are dictating a shift in paternalistic pension policies -- one that could accelerate if Congress irons out long-debated pension reforms this year.

Some 34 million workers in the private sector are still covered by traditional pensions, according to the Pension Coalition, a business group. There are 31,000 such plans, paying $120 billion a year in benefits (roughly the GDP of Israel). But the number of these defined-benefit plans -- so named because your pension amount is defined by a formula -- has dwindled from 100,000 in 1980. The trend seems inexorable. Of the 1,000 largest companies, 71 either froze or terminated plans in 2004, and another 86 did so through the first nine months of 2005, says Watson Wyatt Worldwide, a consulting firm. Another consultant, Hewitt Associates, polled 220 large companies, of which 16% said they were likely to freeze pensions this year and 29% were considering closing pensions to new employees. Pension liabilities, which are guaranteed and open-ended, can be a heavy burden, particularly on a publicly traded company, whose obligations are known to all.

Some companies still see pensions as a way to attract and keep mid-career workers in a tight labor market. And even those scuttling plans aren't abandoning workers entirely -- just expecting more of them. Beefed-up 401(k) plans, in which employers put in more money and do it sooner, are taking away some of the sting. In these deals, companies often bump up the rate at which they match employee contributions. Some kick in 3% or more of pay before you put in a dime. Assets you build in a 401(k) can go to the next job. That's unlike ordinary pension benefits, which reward long service with one employer and typically don't reach significant levels until late in your career (formulas are based on your highest years' earnings).

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More employers are also automating 401(k) savings. You may be enrolled automatically, see your contributions rise automatically when you get a raise, and have your money invested in a mutual fund that adjusts your holdings as your retirement date approaches. Such do-it-for-me plans are so hands-off that they feel like an old-fashioned pension, where the company took care of everything. But that's not the case.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.