Monday, March 01, 2004

The Coming Fall of the Pension Plan

The trend in the private sector has been away from provided employees a pension plan, or Defined Benefit plan. A Defined Benefit plan is one in which an employer agrees to pay the employee a set amount of money at retirement for the rest of that employees life (in essence, the benefit amount is defined). There is usually a formula to figure out what the actual benefit will be. These plans are very expensive and all the risk is taken by the employer, not the employee. A DB plan also favors workers who are long time employees and retire later in life (after age 60). The plan that these companies are moving over to is called a Defined Contribution plan (DC) and in most cases is funded through a 401(k). In a 401(k) the employee assumes the investment duty and is responsible for funding his/her own retirement. The risk is thereby shifted from the employer to the employee. Over the past few years I have been predicting that the trend in the private sector will begin moving to the public sector (government). Over the past year we have heard governors, mayors, and legislatures all float trial balloons to gauge peoples reaction. The reaction has usually been extremely negative from workers, but more positive from taxpayers (who ultimately pay for a portion of the benefit). While no government plans that I am aware have made the switch (except for Florida, but it wasn't a complete switch, just another option), it is only a matter of time. Daniel Weintraub, a writer for the Sacramento Bee proposed just such a plan this weekend in his column. Many people believe Social Security should be switched from a DB to a DC plan funded with private accounts. When governments start seeing the money they could save by eliminating the higher cost DB plans they will begin salivating - it will take a long time, perhaps a decade or two, but eventually they will wear down the unions and convince the taxpayers that the a DC plan is the way to go. Keep in mind that I am not advocating for, or against either plan, just keeping you aware of the trends and how I see them playing out. For those of you in a DB plan, don't worry, usually a switch is made only for new hires. I have been to meetings with Unions on this issue and they are vehemently against the idea of DC plans, they want to keep the DB plans - so expect them to continue to fight for that benefit. As for me, I would rather have a DC plan with a generous match than a DB plan - but remember, I know what I am doing - I am trained in this area - most people aren't. Most people cannot invest on their own successfully, so perhaps the answer is something like what Florida has done - give the workers a choice of either the DB or the DC. Only time will tell, but remember where you heard it from first!!

Till Next Time....

ScottyD
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