How's Your Pension Fund Doing?
Though the majority of companies now allow their employees to choose how their pension money is invested - through 401(k) plans - millions of Americans still are enrolled in traditional pension plans in which employers promise to pay out a certain amount of money after workers retire.
These so-called defined benefit plans are still popular with old-line manufacturing companies, newspapers and other industries that have a large percentage of union workers. The trouble is that workers all too often assume that their pensions will be safe and secure when in fact, thousands of companies underfund their pension plans. This means that they don't contribute enough money to assure they can cut the pension checks 20 years down the road.
Indeed the Pension Benefit Guarantee Corporation (PBGC), an arm of the federal government, annually publishes a list of the worst offenders and tries to shame them into contributing more. The PBGC has come to the rescue of pensioners but caps its payouts, just like the Federal Deposit Insurance Corp.
Who determines what is an adequate level of money for a company to contribute to its pension plan? Company executives and the actuaries and benefit consulting firms they hire. Companies know they must pay pension benefits at some time but they can change their financial assumptions to lower their contributions. For example, companies can assume that they will get, say, a 10 percent rate of return on their bonds, stocks, real estate and other assets in the pension plan. While it is true that in some years returns are that high, they often fall far short.
By bulking up the expected rate of return, companies can contribute less each year in cold hard cash, which increases their profits. One key signal to look for is if the company doesn't change its the assumptions on its returns despite changing economic conditions. Prudent investors should assume that in a slow growth era, such as now, they will earn less money on their money than in a high growth eras, which was the case in the mid-1980s.
Bottom line: Employers are required to provide employees with a report about the financial health of their pension plans. Ask the human resource or financial department for a report and ask questions, particularly if the company has reduced its contributions or increased its interest rate assumptions.
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