MOUNT VERNON — According to an Associated Press article released on Dec. 24, President Bush signed legislation that would free businesses from having to pump billions into pension funds in the coming year — cash companies say they need to stay afloat in a worsening recession.
The legislation does not erase the requirement that companies fund the pension plans, but does adjust some of the payment schedules set up under the 2006 Pension Reform Act. The legislation will also, for 2009, suspend the law that requires seniors who have reached age 70 1/2 to withdraw a minimum amount from their retirement plan or IRA.
“Whether it’s a good thing or a bad thing depends on what side of the fence you are on. If you are an employee and [the company] doesn’t put money in and then they go bankrupt, you have less money coming your way,” said Fred Mankins, financial advisor for Edward Jones Investments.
For many companies, he said, this one-year relief could be the difference between the company remaining solvent or going bankrupt. The new legislation can mean a lot for businesses with pension plans.
“Only if corporations are making money can they afford to put the money in, so if they are not making money this year, next year or three years from now if they are not making enough profit, they can’t put the money in,” said Mankins.
“Historically, when an actual pension plan is employer sponsored, they will give an annuity payout. Pension plans are kind of historical now; not a lot of the newer employees are receiving,” said Lance Spearman, investment advisor for Spearman Financial Services.
Many companies have gone away from pension plans, leaning toward more modern forms of retirement plans such as 401(K) or profit sharing.
“A pension plan is owned by the company. A 401(K) is owned by the employee,” said Mankins. “Pensions came out of the times of the 1920s, ’30s and ’40s, where a company will put so much money in an account for your benefit based on a grid on how long you worked there, and what your wage scale is. So it is a wage-weighted plan.
“Now, companies are moving away from the pension plan to more of a profit sharing 401(K) plan. 401(K) plans are typically set up so that you, as an employee, have to put money in, and then the employer matches [your contribution].”
Most pension plans invest a portion of the sum provided by the company into the stock market, and the other portion into bonds. Bonds are low-risk with low returns, and although the stock market has a higher risk, long-term, it has higher returns, Mankins explained. But how much is invested depends on the company and the type of pension plan.
“Pension plans will typically invest a significant portion of that money in the stock market,” said Mankins. “So when the market is doing well, you may have a couple of years where the employer doesn’t have to put money in because the increase in value is more than the actual amount they need to keep in the plan for the benefit of the employees. But if the stock market is down, the employer has to put more money in to keep the pension plan fully funded.”
“So no matter what company you work for, there is no such thing as a guaranteed pension at the amount it was going to be promised; what could be promised for today, could be taken away tomorrow,” said Spearman.
Although pension plans are an old form of retirement plan and more companies are turning toward more modern types of plans, there are still some large corporations that have pension plans.
“There are so many forms of retirement plans and so many ways a pension plan can be spelled out,” said Spearman. “That is why when we meet with people we look at each individual plan to see how to plan specifics on that particular account.”