Employers abandoning pensions
401(k) plans shift retirement burden to employees
Jackson, MS - (January 27, 2008) – If you're thinking ahead to retirement, chances are slim that you'll have a pension plan providing a monthly check.
"Company-funded pensions are almost dinosaurs," said Nancy Lottridge Anderson, president of New Perspectives in Ridgeland and a finance instructor at Mississippi College. "Many companies have replaced the old-fashioned pension plan with the 401(k)."
The shift from company-funded pensions to 401(k)s moves the responsibility for saving for retirement from the company to the employee.
Bill Dabney of Oxford said retirement benefits weren't a primary factor when he took a pubic relations job at FNC last April, but he values them.
Dabney said he's enrolled in FNC's 401(k) plan that matches 50 percent up to 6 percent of an employee's gross salary.
After World War II, many companies set up pension plans that promised each employee a specific monthly benefit at retirement and required no investment decisions on the employee's part, said Jack VanDerhei, a Temple University pension specialist.
"The trend ever since 1974 has been moving in favor of defined contribution 401(k) plans," VanDerhei said. "The pace has picked up a lot in the last two years because of large pension plan sponsors doing pension plan freezes. It started in January 2006 when IBM decided to freeze its pension plan for new and current employees."
Defined benefit pensions cover about 20 percent of private-sector workers, according to the U.S. Labor Department. That's down from 39 percent three decades ago. Most public-sector workers, who make up about 20 percent of the national work force, are covered by a defined benefit plan.
The 401(k) savings plan came into being in 1978, and within a year or two, most large companies offered it as a supplemental savings vehicle, VanDerhei said. The 401(k) plan is now the primary savings vehicle for retirement many companies offer, he said.
According to the Employee Benefit Research Institute, about 40 percent of workers ages 21-64 in 2006 owned a 401(k)-type plan or an individual retirement account, compared with 34 percent in 1996.
In 2004, about 38 percent of IRA owners contributed the maximum amount allowed by law, almost half the rate in 1996.
VanDerhei said small employers - not major corporations - may be the only ones to offer new traditional-style pension plans.
"It's the uncertainty of what happens with the financial markets and regulations," he said. "A lot of large corporations say we can't have that kind of volatility."
Cellular South, a privately held telecommunications company, is one Mississippi company that still offers its full-time employees a company-funded pension plan, 401(k) savings plan and employee stock options. The company has 950 employees in Mississippi, Tennessee, Alabama and Florida.
"We do that because we're looking for long-term, career-minded employees, and it works well," said company spokesman Jim Richmond. "It sets us apart from other companies."
The majority of Americans, however, do not have a retirement plan, according to the Employee Benefit Research Institute.
With most 401(k)s, an employee must decide to participate, figure how much to contribute and how to allocate his or her contribution, VanDerhei said. Upon retirement, it's necessary to decide how much to take out and when, he said.
"A lot of people don't have the necessary financial acumen to do a good job," he said. "Many people don't know the difference between stocks and bonds. It can be overwhelming."
The company-funded pension put all the risk on the employer, although the 401(k) puts it on the employee, Anderson said. "If the employee makes bad investment choices -is too aggressive or isn't aggressive enough - the risk is on him," she said.
Anderson said "you'd be amazed" at the number of educated consumers she advises who are clueless about how to manage their 401(k) plans.
What's most important about a 401(k) is to participate - and to participate at as young an age as possible, she said. "If you're 25, you're not thinking about retirement but your 20s are when you need to start putting money aside," she said.
Stacy Wall, president of Pinnacle Trust, recommends a worker increase his 401(k) contribution with each pay raise. "Over time you won't feel like you took a pay cut," he said.
Most people fail to save enough for retirement, he said, noting retirement calculators on the Internet can help estimate how much money is needed.
Education is key to employee participation in a 401(k) program, said Bill Caldwell, corporate director of human resources for Oxford-based FNC Inc., a technology company.
About 93 percent of FNC's 250 employees participate in the 401(k) plan this year, he said. All employees are automatically entered in the plan at 3 percent of their gross salary and may opt out if they choose, he said. "It's always financial reasons when they opt out," he said.
The company that manages the 401(k) plan provides education about investing for FNC's employees and employees find that helpful, Caldwell said.
Barbara McDonald, manager of marketing for the Education Services Foundation in Jackson, contributes to a TIAA CREF 403(b) retirement plan and also has a financial adviser who helps invest retirement dollars from her former jobs. "I've been very careful when I have left other jobs to take the money and reinvest it," she said.
McDonald said she prefers conservative to risky investments, and she pays close attention to quarterly statements that show how her investments performed. "If something is doing badly, I can always change it," she said.
VanDerhei said some 401(k) plans offer target date or life cycle funds that automatically rebalance and take some of the hassle out of investing.
"It's a great thing for the majority of 401(k) participants," he said. "For the vast majority, it's a good way to get started."
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