Pensions: The Big Chill
Even healthy firms are putting traditional pension plans on ice. But workers aren't entirely left out in the cold.
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).
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.
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.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
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.
-
Three Gen X Retirement Mistakes for Millennials, Gen Z to Avoid
Many Gen Xers haven’t prioritized saving for retirement and face a crisis as the first generation to retire without substantial support from pension plans.
By Tiffani Potesta Published
-
How To Use Beta in Investing
Beta is one way to measure a stock's historical volatility. Here's how it works.
By Coryanne Hicks Published
-
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
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 Published
-
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 Published
-
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 Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
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 Published
-
Is a Medicare Advantage Plan Right for You?
Medicare Advantage plans can provide additional benefits beneficiaries can't get through original Medicare for no or a low monthly premium. But there are downsides to this insurance too.
By Jackie Stewart Published