Employers continue to move away from traditional pension plans, replacing them with 401(k) plans that shift the burden of saving for retirement and managing investment risks to employees. And they're increasingly offering to buy out pensions with a lump-sum payment -- a move which may not be in the best interest of retirees.
While the availability of pension benefits to new, and sometimes existing employees, has been declining for decades, the latest change in employee retirement security focuses on the distribution end. Some employers, led by auto giants GM and Ford, have offered to buy out the monthly pension benefits of existing employees.
As a result, workers are becoming more responsible for saving, investing and now distributing their retirement nest eggs.
Few are equipped to do it on their own. This should create even more opportunities for financial advisers, from those that work with employers to set up, monitor and advise plans, to those who work with individual clients to coordinate their investment strategies and design income distribution plans.
New reports from global professional services firm Towers Watson and the Pension Rights Center list the latest players in the pension de-risking arena.
The Towers Watson analysis, released Wednesday, found that only 30 Fortune 100 companies now offer a defined benefit pension plan to newly hired salaried workers. That's down from 33 companies last year and is less than half of the number of firms that offered pensions in 2005. Back in 1985, at the height of the traditional pension era, 90% of Fortune 100 companies offer traditional pensions to their new employees.
Now the tables are turned. Today, 70 of the country's biggest 100 employers offer only a defined contribution plan, such as a 401(k), to new hires compared with 67 companies at the end of last year and 32 companies in 2005. Back in 1985, a mere 10 companies offered only 401(k)-type plans to new employees.
Some of the shift from DB to DC plans stems from annual turnover in the Fortune 100 list, reflecting mergers, spin-offs, new or rapidly growing businesses, and bankruptcies, as well as shifts in the sector makeup over the past 20 to 30 years, the Towers Watson analysis noted. For example, 30 years ago, most Fortune 100 companies were in manufacturing, a sector that typically offered traditional pension plans to new hires. Over time, these companies have been replaced by high-tech companies, most of which never offered DB retirement plans.
“The ongoing shift from DB to DC plans due to cost and cost volatility is helping to create a next generation of retirement-age workers who may not be able to afford to retire when they would ideally like to,” said Kevin Wagner, a senior retirement consultant at Towers Watson.
Meanwhile, some retirees who are already receiving pensions from former employers are being asked to choose between keeping their monthly benefit check or to swapping it for a lump sum.
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Ford led the charge in April by offering lump sums to 90,000 salaried retirees and former vested employees. GM followed with a similar offer to 42,000 retirees and former employees in June. Since then, NCR Corporation, the New York Times Company, Archer-Daniels-Midland Corporation, Thomson Reuters, Equifax and Yum Brands have offered pension buyouts to certain groups of employees, former employees or retirees.
While the idea of suddenly having a large sum of money is tempting, it requires careful analysis. Advisers should be ready to step in with appropriate guidance.
For most retirees, a guaranteed stream of income for life is a better option than a lump sum, the Pension Rights Center warns. The only situations in which a lump sum should be seriously considered are those in poor health, who may not live long and who do not need to provide income for a surviving spouse, or those who have other adequate sources of secure income.
For more issues to consider in the buyout decision, see the Pension Rights Center's fact sheet on lump sums (www.pensionrights.org/publications/fact-sheet/should-you-take-your-pension-lump-sum ).