If you happen to work for a private-sector employer who provides as a benefit a traditional pension, you might consider putting in place a back-up plan.
Yes, in recent weeks, a number of well-known firms including UPS and General Mills have frozen the pay and service amounts used to calculate pension benefits for active employees who participate in the those plans. And more are likely to follow. In fact, in 2014, more than one out of three Fortune 500 companies froze their defined benefit plans in one way or another, according to published reports.
To be sure, fewer and fewer workers have a traditional defined benefit plan — a plan where you received a fixed amount monthly from your employer typically for as long as you or, in some cases, as long as your spouse lives — these days. Just 2% of private-sector workers had a defined benefit plan in 2014 and only 11% had a defined contribution and defined benefit plan in 2014, according to the Employee Benefits Research Institute (EBRI).
By way of background, in a defined benefit plan, each employee’s future benefit is determined by a specific formula, and the plan provides a nominal level of benefits on retirement, according to EBRI. Usually, the promised benefit is tied to the employee’s earnings, length of service, or both, EBRI notes.
So, for instance, let’s say a 50-year-old worker planned on getting $2,000 per month based on his or her projected earnings and length of service, but now — given a pension freeze — will receive something less than that, say $1,500.
So, what’s a worker to do?
Take matters into your own hands. Workers affected by a defined benefit plan freeze should also consider themselves officially on notice that the pilot jumped off their retirement plane,” says Jean-Luc Bourdon, a principal with Brightpath Wealth Planning. “They must take control and safely land at their retirement destination.”
Get info. According to John Kilroy, a managing member of iValue Financial Planning, anyone facing a frozen defined benefit plan should first obtain information regarding options offered by the employer, including lump sum or annuity distributions of the plan balance. “In addition, the employer may be offering alternative plans, such as cash balance or other defined contribution plans, that the employee may wish to consider,” he says.
Get help. Kilroy also suggests sharing that information with an adviser, preferably a certified financial professional, who can integrate the details of the frozen pension plan into a comprehensive analysis of the employee’s readiness for retirement. “The significance of the plan balance to the employee’s net worth will vary, thereby influencing the degree of risk associated with any potential decision,” he says.
How’s the company’s financial health? Consider too, says Kilroy, the circumstances surrounding the employer’s decision to freeze the plan. “The employer’s perceived financial stability may influence the course of action considered by the employee,” he says.
Kilroy recommends taking these steps before contemplating how, or whether, the employee may need to replace the loss of future contributions to the frozen plan.
Got a shortfall? If you determine that you’ll have a shortfall between the income you’ll need in retirement and your expenses, you’ll have many options. You could save more, reduce retirement expenses, investment more aggressively, work longer, delay Social Security, or do any combination of those tactics. You might also consider buying products that provide guaranteed income, similar to that provided by a defined benefit pension plan, such as a qualified longevity annuity contract (QLAC) or deferred income annuity.
Don’t, however, do this without consulting with a financial adviser who can help you determine what’s best for you. “There are not easy solutions because retirement accounts involve complex choices that will vary for everyone,” Bourdon says.
For example, he says guaranteed income products such as a QLAC, or immediate or deferred annuities make sense for some, but not all people.
“Rental real estate can be greatly beneficial for some retirees,” Bourdon says. “It can also be a nightmare for others. So, the best thing to do is to a commit to gathering the expertise needed to craft a clear, personalized and realistic plan.”
Source: USA Today