Thursday, January 5, 2012

The Amputation of One of the 3 Legs:The Pension Plan Problem

The Three Legged Retirement Stool: Pension plans, Qualified Plans, and Social Security. Currently, Pension plans are in dire straights and they are on the operating table seeking amputation.
Pension plans in many settings are unfunded with large deficits shortfalls looming. In this particular article discussing the Rhode Island pension plan problem, it analyzes the issues surrounding the deficit problem with its Pension Plan. This is not exception to the rule, as many pension plans are suffering a similar fate. There are a farrago of reasons why these plans are becoming extinct, but the main reason is because of the higher administrative cost to provide the guarantee benefit and a fixed return on principle to grow the pension balance. Pension Plans are defined benefit plans, and they are supposed to provide a guaranteed benefit at retirement for the employee. Since there is a higher cost to administer these types of plans, many companies are moving from a Defined benefit plan to a Defined Contribution Plan. A Defined Contribution Plan typically comprise the following: e.g 401k, 457,403b, etc. The administration cost is much cheaper, but the employee now assumes the risk.

These Defined Contribution Plans have risk also, as detailed by my report labeled "The Truth about Retirement Plans". Simply placing money into a qualified plan and buying "cheaper" term insurance may not be enough for retirement.  It is quixotic to think that simply placing money in a Qualified plan and purchasing cheap term insurance will send people into the land of milk and honey at retirement. The current investor must be fluid and flexible in his/her approach.

In the past, the conventional investing wisdom was the three legged stool approach: Defined Benefit, Defined Contribution Plans, and Social Security. It is well documented the problems with Social Security, its problems are similar to Defined Benefit plans, but add in for good measure the political tomfoolery from the fine elected officials in Washington DC. For the average investor saving for retirement, it looks like the 3 legged stool maybe down to one leg.

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