Personal Finance > Insurance

The best retirement benefits
Good old-fashioned pensions are making a comeback.
November 20, 2002: 5:00 PM EST
Ellen McGirt, MONEY Magazine

NEW YORK (MONEY Magazine) - As the stock market continues to take a beating, so do the nest eggs that are depending upon it. In an unusual bright spot, pension plan participants have enjoyed a psychological buffer from the slings and arrows of market forces.

But the lingering lessons of company-stock overload (like Enron) and continuing stock market woes have forced both plan sponsors and participants to weigh some difficult choices.

Defined-benefit plans

The bull market saw employees clamoring for the dream of wealth that only the stock market could bring. As a result, the traditional pension became the red-headed stepchild of retirement plans. Now the persistent market downturn has given the pension a new cachet, especially for people who are at or close to retirement.

"Pension plans offer a lifetime annuity as a method of payment. You know what to expect, you know you're not going to outlast it," explains Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries. "Those of us with 401(k)s have learned about investment risk the hard way. If someone had all their money in company stock, you can't fix that."

But despite the renewed appreciation for the tried and true, don't count on the old-fashioned company pensions to fund your golden years. For one thing, they're too expensive to administer. Second: Market losses are forcing pension administrators to cough up some cash.

"Plans were so well funded that they were booking income, year after year," explains John Ehrhardt of Milliman USA, who administered the survey for Money. No fuss, no muss, no additional contributions were needed from the employer. "Now companies are looking at cash requirements for the first time in 15 years."

Also on the horizon: pension reform. Proposed federal regulations will mandate greater transparency in pension payouts, balances and administration. If plan managers are to keep their participants in the loop on the state of their pensions, then a spate of fiscal and communications challenges loom ahead. Throw in the looming boomer retirement wave, and even hard-core corporate supporters of traditional pensions are seriously eyeing less costly cash-balance and 401(k) plans.

That said, of the 109 companies in our survey, 85 offer a defined-benefit plan, of which 41 are traditional plans. (For the second year in a row, Northwestern Mutual, No. 8, has the most generous plan; retirees can expect over 50 percent of their salary after 25 years of service.)

Breaking it down further, 38 companies offer cash-balance plans and five offer pension equity plans. Cash-balance plans, which are hybrids of defined-contributions and defined-benefit plans, offer an annual employer contribution based on a percentage of salary, which is invested on your behalf.

Rather than drawing an annuity based on a percentage of your final salary, as in traditional pensions, cash-balance-plan payouts are based on how much is in your account at retirement. Pension equity plans are similar to traditional pension plans, but sometimes the payouts are lower.

Not surprisingly, the number of cash-balance plans offered by our survey companies has increased significantly -- from 27 percent in 2001 to 44 percent in 2002. This year, however, the estimated average expected retirement benefit under these cash-balance plans was 40 percent less than the estimated retirement benefit that traditional pensions would provide our sample employee. Several survey respondents report that they intend to switch to cash-balance plans next year.

Defined-contribution plans

Again, some mixed results. On the positive side, all of our respondents offer a 401(k) or other defined-contribution plan or profit-sharing plan. Nearly all (100 of the 109 companies) offer automatic matching contributions on 401(k)s -- the average employer match was 3.7 percent of pay for those employees who max out their contributions.

And 41 companies kicked in either an additional discretionary match (based on company performance), a straight-out profit-sharing contribution or both. The average additional employer contribution was 5 percent of employees' salary.

But the steady pounding on their portfolios has left many employees reeling. "In a falling market, investment choice is a hot issue," explains Milliman's Bob Weatherford. Although only 22 of the companies surveyed allow for unlimited choice of investment funds, the vast majority allow employees to change their investment mix daily.  Top of page

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