Like financial dinosaurs, the traditional corporate pension plan is facing extinction. Certain industries are trying to keep these retirement vehicles in place, but the cost is often becoming overwhelming for many companies. Lagging behind the trend in the corporate world, many cities, states and other public services are coming to the realization they cannot support the ongoing costs of maintaining a traditional defined benefit pension plan for new employees.
Several factors are contributing to the dramatic increase in the cost of a pension plan for the typical corporation. One of the more minor factors is that on average, people are living longer. Therefore, the pension plans are obligated to make payments for longer periods of time.
Another contributing factor to the cost of ongoing maintenance of a defined benefit pension plan is the performance of the overall stock market over the past decade or so. Only until the last several weeks has the U.S. stock market average returned to levels last achieved more than five years ago.
For most pension plan sponsors, the biggest contributor to the increasing cost of a pension plan is the very low level of interest rates. These low rates negatively impact pension plans from at least two sides. Lower interest rates mean the pension plans are earning lower yields on the new investments in the bond markets. Of greater effect on the cost of the traditional pension plan is how low interest rates increase the current cost of the future obligations to the future retirees. As interest rates decline, the calculation mechanism results in a higher current cost for future pension obligations. Corporations are then required to contribute more money into the pension plans today in order to ensure the assets can meet the future costs of the projected pension obligations.
So what does the elimination of the traditional corporate pension plan mean to the average worker at a publicly owned company? First, retirement planning is on your shoulders. While some sort of Social Security plan might provide some financial assistance in the future, the dwindling health of this government-sponsored plan should not be expected to provide significant financial resources for someone expecting to retire in the next 15 years or more.
Second, employees should take advantage of whatever retirement savings plan is offered by their employer. Generally, these plans offer some sort of tax-preferred method of savings. While it might be inconvenient or even somewhat painful in the current environment to set aside funds toward the goal of an eventual retirement, the longer term financial benefits will ultimately outweigh the near-term costs.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.