As the American economy continues to affect the bottom line of big businesses, larger employers are finding ways to save money by cutting employee benefits.  One of the ways to save money is by establishing a pension freeze for all employees. 

 

What Happens in a Pension Freeze?

 

A pension freeze does not mean that an employee completely loses an accrued defined-benefit pension plan.  What it does mean is that the company will no longer pay into the pension.  Neither will any future raises nor years of service be factored into the final pension benefit amount.

 

Pension freezes may have minimal effect on those workers who have accrued a sizable pension amount after years of service and are nearing retirement age in a few years. Younger workers who do not plan to stay with the same company for 30 years as they seek career enhancement elsewhere are also likely not to be affected.  But what about the millions of loyal employees who have put in 20 or 30 years of service and are still a decade or more away from retirement?

 

What Happens When Your Pension is Replaced with a 401(k)?

 

Many employers have replaced an employee pension amount with 401(k) enhancements.  However, there are issues with switching an employer defined-contribution pension plan with additional 401(k) benefits.

 

First, this option requires employees to deduct more of their own money to take advantage of 401(k) savings.  Whereas a pension plan is completely sponsored by the employer, the employee must take ownership of his or her 401(k) by choosing deduction amounts and investment options.

 

Second, a 401(k) must face economic situations that can cause it to reduce in value.  Many employees have witnessed their 401(k) balances drop considerably just in 2008 alone.  And it will take years to rebuild that wealth for retirement as the stock market gains confidence and begins to grow again.

 

And third, a 401(k) enhancement ultimately loses final retirement value for workers who might otherwise have a full pension.  A study from The Center for Retirement Research at Boston College shows that a worker who devoted 25 to 30 years of service to an employer could receive a retirement income replacement of about 43% of final earnings through pension.  However, if the employee is now 50 and pension is frozen and replaced with enhanced 401(k) options, the same employee will only receive about 28% of final earnings at retirement.

 

Therefore, it is up to the individual employee to manage the gap between lost pension and other retirement income. 

 

Retirement Savings

 

An employee must depend more heavily on 401(k) and IRAs to reach retirement.  That means choosing higher deduction amounts and wisely managing the investment choices in each.  As of 2009, an employee 49 years or younger can withhold up to $15,500 into a 401(k) account, or $5,000 in an IRA.  Workers 50 or older can save $22,000 per year in a 401(k), and up to $6,000 in an IRA.  Saving the maximum amount can be a big addition to the final retirement savings value.

 

Personal Savings

 

A worker may also have to save additional money outside of a personal retirement savings account.  Saving money in a money market account or putting additional savings into an annuity can result in additional retirement income.

 

Investments

 

And workers should not be afraid to invest additional money as they approach retirement.  Though the stock market is currently volatile, history shows us that it will once again be on the rise.  Another potential retirement investment is real estate.  Purchasing a home and renting it to a tenant for 20 or 30 years pays down the mortgage outside of the owner’s pocket and creates considerable wealth when the home appreciates in value over that time period.

 

Those who wish to start enhancing their retirement options due to a pension freeze should talk to an asset management company such as www.iamllc.biz or wealth manager  like www.kenhimmler.com who can help formulate a solid financial strategy toward retirement.

 

 

Authored by Kenneth Himmler, Sr.