
The retirement fund crisis in the public sector will determine how employees in the private sector save and invest for retirement. This crisis should teach everyone that you cannot rely on the government for your financial future. More and more companies are freezing their pension plans. This will put more focus on the 401(k) plans and how they are offered. Americans must begin a disciplined approach to saving for their own future.
Companies from defense contractor Lockheed Martin Corp. to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.“They’re going to have to kick money in,” said John Ehrhardt, a consulting actuary at Seattle-based Milliman. “We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”
That’s money that won’t go back to shareholders through dividends or buybacks, or toward expansion, said Kevin McLaughlin, a pension risk management specialist with consultant Mercer in New York.
Under the federal Pension Protection Act, which was passed in 2006 and mostly took effect in 2008, tighter accounting rules gave employers seven years to fully fund their retirement plans and required them to use a specified, market-based rate of return to compute liabilities instead of a company estimate.
The decline in the number of firms offering a pension plan will continue. The result of this is more focus on the importance of the 401(k) plan as a retirement savings vehicle. The 401(k) plan of tomorrow will have a more pension fund like feel. This means model portfolios and less options. Leave the investment choice and strategy to professionals.
Please comment or call to discuss how this can affect you and your organization.
Related articles
- GM takes final step to eliminate pension plans, switch entirely to 401Ks (autoblog.com)
- Bank of America to freeze pension plan (jobmarketmonitor.com)
- 401k Plan Sponsors and the Risk of Fiduciary Liability (401kplanadvisors.com)