Pension plans at one time were considered one of the primary benefits that a company offered its employees. Pensions strongly encouraged people to not only join a company’s ranks, but also to stay loyal to it for many years. The arrival of new types of retirement plans in recent years, however, has meant that pensions are rapidly becoming a thing of the past – and possibly almost extinct.
Ever since the arrival of retirement plans such as 401(k)’s, pensions have been rapidly decreasing – all around the world. In the US, according to the Social Security Administration (SSA), the number of wage and salary earners with traditional defined-benefit (DB) pensions dropped from 38 percent to just 20 percent between the years of 1980 to 2008.
This sudden decrease caused many employers to freeze the benefits of those within the DB plans, resulting in no more new money being earned, and no new employees being added under their companies DB plans. As a replacement, most companies have shifted their sights to the use of DC (defined contribution) pensions, which includes the use of 401(k)’s.
Another problem, stated by Investopedia, is that the agency that ensures pensions for DB plans, the Pension Benefit Guaranty Corporation (PBGC), is itself not in very good shape financially. In the year 2011, it had an annual deficit that went from $23 billion in 2010, to $26 billion – the worst it’s ever had.
Investopedia also states that there are four main types of pension plans in the US. Probably the most secure are those for Federal and the various state and local government employees. The other two types are private single-employer plans, which are the bigger of the groups for private plans; and the plans for private multi-employers, where several employers make contributions to a larger group plan made available to multiple companies.
One newspaper, the Cleveland Dispatch, noted that pensions were rapidly disappearing as far back as 2007. It observed at that time that only 31 of the top 100 companies in America offered traditional pension plans, and many of the other ones are now offering their employees defined contribution plans, such as 401(k)s.
The result of reducing or eliminating pension plans will hurt most those who started working in the seventies or later. It also greatly affects those over 50 because of the pension freeze, because they do not have enough time to make up for the loss. Forbes mentions that those who will fare best in the transition are the young, because they have enough time to invest into their 401(k)s – but they will have to invest wisely.
The good news about 401(k)s is that there are many to choose from. Instead of pensions, employers typically offer a number of different types of 401(k)s – usually enough to make it rather confusing to select your best option. The best way to use a 401(k) is to invest heavily into it, which gives you tax-deferred income, and if there are also matching funds contributed by your employer, a lot of free money that can be used to build a nice sized retirement fund, especially if you are young and able to direct a lot of the money toward stocks.