In a new report, Retirement Offerings in the Fortune 500: A Retrospective, Willis Towers Watson discloses that pensions are only offered by 16% of Fortune 500 companies. That percentage has decreased from 59% in 1998.
For generations, pensions were standard with many employers. But as companies search for low-cost alternatives, they tend to do away with costly pension plans. Despite pensions becoming a thing of the past, there are still a few industries that offer this employee benefit.
So, what is a pension and how can it benefit your retirement?
The Term Pension Defined
A pension, otherwise known as a defined benefit plan, helps employees prepare for retirement. Pension plans are an employee benefit that offers a guaranteed automatic payout in retirement. Employers base the payout amounts on a formula that includes their salary and the number of years spent working for the organization. Essentially, the longer you work and the more you get paid, the larger your payout will be in retirement.
Many employers offered this type of plan until the early 1980s when the IRS rolled out the 401(k) plan. In 1978, Congress passed the Revenue Act of 1978 giving employees a tax-deferred option to postpone payment from bonuses and stock options.
The creation of the 401(k) has played a large role in the extinction of traditional pension plans. The creation of the 401(k) shifted the responsibility of saving for retirement into the hands of the employees.
Pros and Cons to a Pension
For those who may still have the opportunity to benefit from a pension plan, they come with a few advantages and disadvantages. The biggest advantage of a pension plan is the security it provides workers. When you participate in a pension plan, you know exactly how much you will receive when you retire. Other retirement savings options like a 401(k) or IRA give you some uncertainty. You can’t predict the market or how your investments will perform. With a pension you know exactly what to expect and when you can retire.
Another benefit is that pension plans are secured with the assistance of the Pension Benefit Guaranty Corporation (PBGC). This is a government-backed organization that acts as insurance for your defined benefit plan. The company who sponsors the pension plan must pay a premium for each plan. Therefore, if something were to happen to the company, the PBGC is able to step in.
One disadvantage to a pension plan is that you can’t select your investment mix. This limits your opportunity to receive greater returns and make more money in the future. Selecting your asset allocation for your retirement savings allows you to take more control of your future returns.
This also limits the amount of jurisdiction you have when managing your assets. Some investors like to take a hands-off approach while other like to monitor their investments daily. Pension plans give the sponsor complete control over the investment selection and direction of the plan. Essentially, taking it out of the hands of the employees.
Another disadvantage to a traditional pension plan is you may need to work at a specific company your entire career in order to maximize your benefits. Many of these plan are nontransferable. So, if you change careers and want to continue saving for retirement, you will need to entertain other savings vehicles.
Industries Where Pension Plans Are Still Common
Although many companies have done away with traditional or hybrid pension plans, some industries still offer them. Here are a few industries that may still offer a defined benefit plan:
- Education services: According to the U.S. Bureau of Labor Statistics many educational service providers still offer pensions. Pension offerings are usually available at most primary and secondary levels as well as at the collegiate level. Benefit options may vary by state. It’s important to note that most of these plans may not be available in the near future.
- Manufacturing and production: These industries are often unionized. Many workers in unionized trades have historically had pension plans available to them.
- Utilities: Typically, utility companies offer pension plans due to heavy unionization.
- State and government workers: As of March 2018, 86% of government workers have a traditional pension plan. State and government workers include some police officers, firefighters, construction workers, health care and social assistance employees.
- Other industries with unions: A union card may help your eligibility. 68% of union employees receive defined benefit plans while only 12% of nonunion workers do.
- Large companies: 41% of businesses with over 500 employees have a traditional pension plan.
If you’re looking for a company with a pension plan, you should look for a larger company or one with union workers. Both characteristics may increase your chances of receiving a defined benefit plan.
How Pension Plans Compare to Other Types of Retirement Savings
While pension plans may offer security, you must stay at one company for your entire career to maximize this benefit. With many employees changing jobs throughout their career, a pension plan may not be the best retirement savings option.
If you’re selecting an industry or career path that doesn’t offer a pension plan, you still have other options to help you save for retirement.
With 401(k) plans you have the opportunity to select your own investment mix. Many employers may offer a match program. This means that they’ll match your contribution amount up to a certain percentage or dollar amount. For example, if you contribute 3% of your salary to your 401(k) plan, your employer may contribute an additional 3% match.
You can personally contribute up to $19,000 per year with a $1,000 makeup contribution for accountholders 50 or older. You can contribute to your 401(k) account with pretax dollars. In retirement, all of your distributions will be subject to your current income tax bracket. If you take distributions before you turn 59 ½ years old a 10% penalty may also apply.
While 401(k) plans may offer more flexibility and the power to choose investments, they’re not as secure as a pension plan.
Individual Retirement Account (IRA)
If your company doesn’t offer a 401(k) plan or pension plan, you may want to consider an IRA account. Similar to a traditional 401(k), you can contribute to the account with pretax dollars. Distributions in retirement are subject to tax deductions.
Company-sponsored plans may give you a limited number of options for investment choices. With this type of account, you have complete control of your investment selections.
You can contribute up to $6,000 annually with a $1,000 makeup contribution for accountholders 50 years old or older.
A Roth IRA is a version of a traditional IRA. With this account you contribute after-tax dollars. Since you are paying your taxes upfront, you can take distributions in retirement tax-free. If you anticipate your taxes increasing in retirement, it may be beneficial to open a Roth IRA.
However, Roth IRAs have income limits. Certain high-earning individuals may not be able to participate based on their income level.
The Bottom Line
Pension plans benefit employees around the nation. Even if your employer offers a pension plan, it’s important to take responsibility for your own retirement savings. With the ever-changing landscape of the economy, relying on your employer to plan for your retirement could end up significantly costing you and potentially leaving you with nothing.
How do you plan to save for retirement? What saving tips can you offer other workers in similar financial situations? We want to hear from you. Please leave your comments below.
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