Pete_resized“The Stuff You Wont Hear Anywhere Else”

Are Your Pensions Safe?…..Let The Games Begin!

Defined Benefit Plans are retirement plans which cover about 40 million Americans and are designed to give its recipients a specific payout when you retire. That is why they are called Defined Benefit Plans. It is the same concept as Social Security, you receive benefit payments each month, the benefits you receive depends on what your earnings were and how much was contributed. Usually the dollar amount does not change but may increase slightly with a cost of living adjustment. Unlike Social Security payments which base its benefits on an average interest rate of 2%, Defined Benefit Plans invest in the markets to try to obtain higher returns. If the return on investments are greater then expected the company can contribute less than the designated dollar amount to meet their future obligations, basing it on current and future returns by anticipating the markets. Sometimes it works out, sometimes it doesn’t.

But what happens when interest rates decline?

What happens when the markets under-perform?

Have you ever heard of an under-funded pension?……Bingo!

Under the current accounting rules declining interest rates have triggered and increase in Pension obligations, well if you were promising a specific benefit you need a specific amount of money to make those payments, don’t you ?

The combined pension deficit for S&P 1500 companies has ballooned to 568 Billion Dollars at the end of June, which is a 164 Billion Dollar increase from the end of 2015. this is according to Mercer, a benefits consulting firm. How are these companies going to fill these deficits by the end of the year when their funding calculations are typically suppose to be completed?

Its going to be a blood bath.

The only one who will make money is the U.S. Pension Guarantee Corp.This is a Federal Agency which guarantees private sector Pension Plans. The agency collects a fixed fee for each person who is enrolled in a private sector pension plan. If the Pension Plan is under-funded, it collects a separate fee for every dollar the plan is in the red, sort of like FDIC for pensions. Remember this is a Federal Agency controlled by Congress so its budget falls under the Bipartisan Budget Act, and all the fees it collects counts as Federal income to the tune of last years intake of 4.1 Billion Dollars in premium revenue .

Since the going is good Congress believes in my opinion if its not broke, they have to break it so in 2015 they mandated a 25% increase in the fixed fee to be in effect between 2016 and 2019. for plans sponsored by a single employer. So whats the incentive for employers to offer these plans? In my opinion there is none. These plans are old school offered by Federal and State Governments, school districts etc. and Large Corporations. they are the only ones who can keep these plans afloat. They are not typically used by small businesses.

A small business can offer other methods of compensation to executives and key employees without the regulations imposed on them by the Federal Government such as deferred compensation to key employees, bonuses, life insurance etc. All this at the company’s discretion not by government mandate.

One of the easiest and an economical plan for a company to set up to retain employees is a 401k Retirement Plan. Every employee can participate if qualified, there are no investment return obligations, the employer chooses a vesting schedule. Each employee decides based on his or her risk tolerance where the investment dollars are allocated and the amount to invest out of their pay check. Offering retirement plans are a great way to attract and retain key employees.

There are many ventures for your company to venture to should you decide to set a retirement plan in place. With all the choices available today our firm can analyze your particular situation and present you with the alternatives which suit your best interests of your company and fit within your budget.

Remember our consultations are always FREE. Contact us for a confidential appointment, You will be glad you did.

Peter DeChristopher

 

 

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