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A New Chapter for Retirement
John F. Kennedy once said, “Change is the law of life. And
those who look only to the past or present are certain to miss the future.”
This is certainly true of preparing for retirement. If we continue to expect
that the ways of the past will see us through to our futures, we will be
left behind. The methods that helped prepare us for retirement are quickly
disappearing, and we must start using others.
Today’s companies are rewriting the retirement rules for
working Americans. Traditional pension plans, which gained prominence in the
20th century, are rapidly disappearing because of the high costs involved in
funding them. Some corporations are defaulting on their plans, and an
increasing number of companies have underfunded or at-risk plans.
To help protect employees with corporate pensions, the
federal government has enacted laws requiring employers to meet a 100%
funding target for their defined-benefit plans. Companies that sponsor
pension plans are also required to pay higher insurance premiums to the
Pension Benefit Guaranty Corporation (PBGC), which was created by Congress
in 1974 to help protect American workers from the risk of pension default.
Premiums have increased because the PBGC itself is facing a deficit as a
result of more companies defaulting on their pension plans.
Because of these costly requirements, it is becoming less and
less attractive for companies to provide traditional pensions to retirees.
Employers with underfunded plans may simply choose to eliminate them, and
even companies with healthy plans may decide that defined-benefit plans are
not worth the cost. As a result, it is likely that more companies will offer
defined-contribution plans like the 401(k) to attract new employees and to
help employees fund their own retirements.
Thus, it is important to be aware that you will have less
help from your employer and will have to rely more on your own savings and
investments to fund your retirement.
The government has tried to help by raising contribution
limits to most employer-sponsored retirement plans. You can contribute money
to these plans on a pre-tax basis. Your contributions and any earnings
accumulate on a tax-deferred basis. Of course, remember that distributions
from most employer-sponsored retirement plans are taxed as ordinary income
and, if taken prior to reaching age 59½, may be subject to an additional 10%
federal income tax penalty.
A number of companies are taking steps to help workers fund
retirement. Many have instituted automatic-enrollment in their
defined-contribution plans to encourage more employees to participate. Some
are enhancing the benefits of their plans by increasing the amount they
contribute to employee accounts and/or enhancing matching contributions.
Many companies that still have traditional pension plans
should be able to pay their promised benefits. But in light of recent
trends, it would be wise to consider all possible sources of retirement
income when reviewing your retirement strategy. With the changing retirement
landscape, there may be no better time than now to size up your current
situation. Your company-sponsored retirement plan will be just one piece of
your retirement funding pie.
© 2007 Emerald Publications
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