Will pension funds suffer the next financial implosion?
Concerns mount as to whether these plans can stay afloat amid recession.
If you are troubled by the loss in value in your 401(k) or other retirement account, you have plenty of company. Even professionally managed pensions suffered an average 26 percent loss in 2008, marking the worst recorded year for defined benefit funds, according to Northern Trust Investment Risk and Analytical Services.Skip to next paragraph
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Despite the grim results, two radically different retirement profiles have emerged. One is workers with defined benefit plans. These employees are guaranteed monthly payments at retirement based on a set percentage of their last paycheck.
Some 80 percent of public-sector employees and 20 percent of private-sector employers participate in defined benefit programs. The Center for Retirement Research (CRR) at Boston College estimates that 20 million active participants and millions of retirees are enrolled in these retirement programs.
The other group includes workers with 401(k) and other defined contribution accounts. These employees are exposed to market downturns with no set retirement benefits. Last year, many of them were too heavily committed to the stock market, suffering losses between 30 and 40 percent.
"While a bad year for every investor, 2008 was particularly bruising for 401(k) members forced to navigate sophisticated, complex market environments largely on their own, exposed to individual portfolio risks far greater than the pooled risk of professionally managed benefit programs," says Keith Brainard, research director for the National Association of State Retirement Administrators, whose members oversee pension benefits of most state and local government employees.
Employees with 401(k) plans who are five to 10 years from retirement are now faced with the possibility of delaying retirement or drastically reducing their lifestyle when they do.
For younger workers with 10 or more years of potential employment, the hope is that investment markets will rebound in 2009 and that 8 to 10 percent returns will once again prevail.
For employees with defined benefit plans, however, personal retirement plans remain largely on course.
But there are problems here, too. Corporate pension plans are underfunded by $409 billion, according to consulting firm Mercer. The CRR estimates that private firms need to increase contributions by about $90 billion this year, as required by the 2006 Pension Protection Act. The law stipulates that firms must eliminate unfunded pension obligations within a seven-year period. But those restrictions were relaxed in December due to the current economic slump.