Once upon a time, the good old “defined benefit” pension plan promised Ma and Pa a guaranteed lifetime retirement income. Employers put a portion of an employee’s salary into an account that would be invested over the years to cover the retirement income obligation.
Borrowing a page from the government – some employer’s convinced their accountants to declare their plans “over-funded,” so they could raid the pension account for other business needs.
Naturally, many pension plans suddenly became underfunded. Government to the rescue: the Pension Benefit Guarantee Corporation was born –institutionalizing a permanent government bailout entity (which, by the way, is also now insolvent).
So most employers got out of the pension business (except government entities which acknowledge no fiscal accountability to anyone) – and turned to the “4-0-something” plans many of us know and participate in. In the process, they shifted three big risks to their employees.
· Employees are responsible for funding the plans
· Employees are responsible for investing the plans
· Employees take on the risk of outliving their money
The employer’s role? Throw in some arbitrary “matching” funds from time to time. Not only are matching funds much less expensive than those defined benefit pension plans; but non-contributing/participating employees cost the employer nothing! What a deal.
But now it seems – employers – still discontent with the cost of the arrangement, are pulling back even further:
1. Some are reducing matching contribution altogether
2. Some are applying “vesting” scheduled to matching funds so that if an employee leaves their job – not all of the matching funds go with them
3. And some are deferring matching contributions to year-end – holding onto compounding that would otherwise be captured by the employee.
Certainly there are exceptions – generous employers with robust matching benefits. But keep an eye out for what’s happening at your company. That retirement benefit might not be as “rich” as it once appeared; and it may be time to consider another option.