Monday, January 09, 2006

The End of Defined Benefit Plans

by Bill McBride on 1/09/2006 02:06:00 AM

First, my post on Angry Bear, Stiglitz and Bilmes: The Real Cost of Iraq War

The NY Times reports: More Companies Ending Promises for Retirement

The death knell for the traditional company pension has been tolling for some time now. Companies in ailing industries like steel, airlines and auto parts have thrown themselves into bankruptcy and turned over their ruined pension plans to the federal government.

Now, with the recent announcements of pension freezes by some of the cream of corporate America - Verizon, Lockheed Martin, Motorola and, just last week, I.B.M. - the bell is tolling even louder. Even strong, stable companies with the means to operate a pension plan are facing longer worker lifespans, looming regulatory and accounting changes and, most important, heightened global competition. Some are deciding they either cannot, or will not, keep making the decades-long promises that a pension plan involves.

...the pension freeze is the latest sign that today's workers are, to a much greater extent, on their own. Companies now emphasize 401(k) plans, which leave workers responsible for ensuring that they have adequate funds for retirement and expose them to the vagaries of the financial markets.
This will put the burden on the employee and from my experience, the employees that will probably need the benefits the most, will contribute the least (as a percentage of income), and invest poorly.

When I was a trustee for a 401(k) plan, I saw the following behavior repeated many times: Less sophisticated investors would tend to be overly conservative putting most of their money in money market funds. Then they would occasionally invest in whatever went up in the most recent quarters. If they had a losing quarter, they would scurry back to the money market fund. Their overall results were poor.

This will leave Social Security Insurance as the only defined benefit portion of an individual's retirement income - an insurance policy for life's vagaries.

Last 10 Posts