Are Company Retirement Plans About to Get Better?

Are Company Retirement Plans About to Get Better? Depending on your vantage point, I guess this question could be debatable. Yet, to me, it certainly seems like things are about to get better! Want to know why?

Maybe in your parents? generation, certainly for your grand-parents' and possibly in your great grand-parents' day, one of the secrets for achieving 'the good life' was to work for a big company with a pension plan. Although fewer than half of private sector workers ever had a defined benefit pension, it was one of the few trademark features of the American dream.

Currently, almost all federal employees and a large majority of state and local government employees have defined benefit plans. Yet, in the private sector, only about 20 percent of workers participate in defined benefit pensions, and that number is expected to drop to the vanishing point over the next ten years or so.

A Defined Benefit retirement plan is one in which plan participants (employees) would expect to receive a certain amount of money per month upon retirement determined by a predefined formula. The formula for calculating the promised benefit amount will usually depend on factors such as age at retirement, number of years of service, and the amount of money earned at or within a few years prior to the time of retirement.

Some would say that, offering up a story about defined-benefit pension plans is akin to discussing ancient history. While many remain in existence, for the most part, defined-benefit plans are relics from a bygone era when unions were able to negotiate prized retirement benefits from employers. In the last twenty years, however, 401(k) plans have become the dominant form of employer-sponsored retirement plans.

Unlike a Defined Benefit plan, a Defined Contribution plan only stipulates that the employee and/or the employer shall contribute a certain amount of money per year into a tax deferred savings account for the plan participant (employee). Other than 401(k) plans, additional examples of Defined Contribution plans include 403(b) and 457 programs, profit sharing plans, SIMPLE's, SEP's and IRA's to name a few.

This article, the first of a four part series, serves only to 'set the stage' for my following articles that will discuss some of the major challenges retirees face with these retirement plans and how policy-makers in Washington, D.C. are trying to make some positive changes.