Is Your Pension Still Safe?
With today’s stagnating stock market, financial institution bail-outs, and economic downturn, no one can blame the average American for worrying about their pension plan. Well, there is both good news and bad news through all this. You should be comforted by the fact that the pension you’ve earned thus far is safe because it is protected in various ways. However, the bad news that traditional pension programs which used to be covered by employers can soon be taken away even before you hit retirement age.
What You Need to Know About Traditional Pension Plans
In essence, this type of plan provides a guaranteed annual return once you hit retirement age. The annual payment is based on your years of service and last average salary. The company contributes most of the money. And unlike the 401(k) plan, the money you accumulate won’t be diminished because of the fluctuating stock market.
Corporate employers are required to maintain the traditional pension plans funded even if the stock market is crashing. Congressed passed the Pension Protection Act in 2006 which dictates the amount of cash a company must put into the pension plan every year. As long as you’ve been covered for at least five years by the same company, you are entitled to the payment upon retirement even if the company discontinues the plan. The only catch is that you need to wait until you hit 55 because this is the eligible retirement age.
Why Do Employers Want to “Freeze” Pension Plans
Legally, corporate employers can freeze their plans. In today’s economic climate, there are a lot of reasons why they are tempted. For instance, the traditional pension plans are viewed as a risk because if the pension plan’s assets don’t make enough money to cover the entire retirement benefits, the corporation will make up for the discrepancy.
This means that instead of using cash for debt repayments, dividends, and new investments, the corporate employer is required to divert their cash flow to pay for retirement benefits. In addition, because majority of pension funds asset are tied up with stocks, there is a high probability that companies need to pay more when the stock market deteriorates.
These developments have enticed an increasing number of companies, including those in the Fortune 500, to put their employees on 401(k) plans. The biggest problem with freezing is that the benefits will be locked in their current level forever. If your company froze the plan when your pension was $2,000, you will receive that same amount upon retirement age even if you stay with the company for 25 more years.
What You Need to Know About Traditional Pension Plans
In essence, this type of plan provides a guaranteed annual return once you hit retirement age. The annual payment is based on your years of service and last average salary. The company contributes most of the money. And unlike the 401(k) plan, the money you accumulate won’t be diminished because of the fluctuating stock market.
Corporate employers are required to maintain the traditional pension plans funded even if the stock market is crashing. Congressed passed the Pension Protection Act in 2006 which dictates the amount of cash a company must put into the pension plan every year. As long as you’ve been covered for at least five years by the same company, you are entitled to the payment upon retirement even if the company discontinues the plan. The only catch is that you need to wait until you hit 55 because this is the eligible retirement age.
Why Do Employers Want to “Freeze” Pension Plans
Legally, corporate employers can freeze their plans. In today’s economic climate, there are a lot of reasons why they are tempted. For instance, the traditional pension plans are viewed as a risk because if the pension plan’s assets don’t make enough money to cover the entire retirement benefits, the corporation will make up for the discrepancy.
This means that instead of using cash for debt repayments, dividends, and new investments, the corporate employer is required to divert their cash flow to pay for retirement benefits. In addition, because majority of pension funds asset are tied up with stocks, there is a high probability that companies need to pay more when the stock market deteriorates.
These developments have enticed an increasing number of companies, including those in the Fortune 500, to put their employees on 401(k) plans. The biggest problem with freezing is that the benefits will be locked in their current level forever. If your company froze the plan when your pension was $2,000, you will receive that same amount upon retirement age even if you stay with the company for 25 more years.