What is a corporate Pension Plan? Well, it’s a formal arrangement between a company and its employees - or the employees' union - that provides funding for the employees' retirement. This pool of funds can be financed in several ways and will eventually be used to make periodic payments to retired employees. In most cases, both employer and employees make regular contributions to the plan. In the past, employers were wholly responsible for contributing to the plan based on an employee's work, length of employment and position held.
Many corporate pension plans promise to fund the living requirements of retired employees until they die. Not surprisingly, financing them can put a strain on corporations. As a result, many companies are changing their pension plans from defined benefit to defined contribution. Remember how pension deficits were huge and insurmountable? Not so much, any more. Corporate America's move away from defined benefit plans hit a dubious milestone: For the first time since Pensions & Investments began listing the largest U.S. retirement plans, not a single corporate name appears in the ranking of the 10 largest defined benefit plans.
Two of the most common corporate pension plans are the defined-benefit and defined-contribution plans. With defined-benefit plans, employee retirement benefits are calculated according to a formula, usually based on duration of employment and salary history, and it is the employer's responsibility to come up with the necessary cash to fund the plan. Defined-contribution plans, on the other hand, offer no guarantee on the amount of benefit that an employee will receive at retirement; the payout from this plan rests solely on the success of the investment plan.
It is also worthy to note that before the 401(k) plan, the profit-sharing plan was the defined contribution plan of choice and made up a small fraction of U.S. retirement plan assets. In 1982, for example, the 25 largest profit-sharing plans in P&I's universe had a total of $13.4 billion in assets, less than GM had in DB assets. Profit-sharing assets were soon dwarfed by those in 401(k) plans
Among the laws the administration backed was the Federal Employees Retirement Act of 1986, which created a three-legged retirement system for federal employees to replace the traditional defined benefit Civil Service Retirement System: Social Security, a new defined benefit plan and a defined contribution plan called the Federal Retirement Thrift Savings Plan. Now it’s clear, pension plans that promise a specific benefit in the future are essentially a contract between current and future generations, and those future generations aren’t represented at the bargaining table.
Here’s the deal, the corporate pension has been around since the 19th century, but really came into its own in the U.S. in the years just after World War II. The defined benefit plans assumed lifetime jobs with a company, which seemed reasonable at the time, but has long since ceased being the American norm. Pension crises at steelmakers and airlines have brought the issue to a head, but arcane accounting rules and low, long-term interest rates mean the accounting benefit for freezing a pension is higher than it would be if long-term rates rise. So, who’s most vulnerable? Well, salaried employees of course, since companies have to negotiate to cut benefits for workers covered by collective bargaining.
Understand that Private sector employees and business owners do not like pension income benefits! If you're still trusting your retirement protection plan to brokers and clueless professionals, your future is vulnerable to every little movement in the Dow. Many have taken the initial step of cashing out a portion of their corporate pensions and seeking guidance from a professional investment advisor to invest in real estate or other corporate investments wisely on their own watch.