Traditional pension plans, or defined benefit plans, are the original backbone of the corporate pension system. Retired employees who have worked for a company with one of these plans are enjoying benefits provided well into old age. Middle aged employees of today who were hired into a company with a pension plan most likely have seen the plan become frozen (meaning employees are no longer earning additional benefits), and possibly terminated altogether, leaving a relatively small benefit for retirement. Younger employees have very likely never heard of a traditional pension or, if they have, only recognize it as a nearly nonexistent benefit of the past.
The diminished role of the pension plan is due to the labyrinth of laws and regulations that employers must navigate in order to sponsor one, not due to a faulty concept for providing retirement benefits. Regardless of their reputation today, defined benefit plans are still an important part of a sound financial strategy for retirement. These plans provide for a set monthly income to a company’s retirees. So, even though an employee is no longer working, a level of income can be relied upon each month. In addition, these pensions will not run out nor are they subject to market risk. No matter how long a retiree lives or how badly investments perform, the monthly income will continue for the retiree’s life. The employee and ultimately the retiree do not have to decide how to invest the money in order to draw the benefit for life. Also, if designated at retirement, a survivor benefit can be a part of the monthly income, leaving a portion of the benefit to the spouse or designated beneficiary for their continuing life.
Blog authored by Cheryl Gabriel, CPC.