By: Kathy J. Bauers, ChFC Ameriprise Financial

Employer-sponsored retirement benefits, along with other employee perks, are experiencing tough times. The traditional, defined benefit pension plan is facing extinction, leaving more workers to fend (and fund) for themselves to provide for their retirement. The decline can be blamed in part on the Pension Protection Act of 2006, which introduced tougher guidelines to strengthen pension funding rules and improve transparency and accountability. The PPA was created with good intentions; however, the new guidelines also put pressure on employers to build pension funding at a time when coffers have been dwindling.

The fact is, pension plan retirement income, generously calculated based on years of service and attained earnings and adjusted to account for the cost of living, is simply too expensive for most businesses to maintain. The increased requirements around pension plan funding combined with a brutal stock market, shrinking profits and stockholder demand have created an extremely unfavorable environment for the continuation of employer-funded retirement plans.

How bad is it? According to a recent study by Watson Wyatt, the majority of current Fortune 100 companies no longer provide a traditional pension plan to new employees, opting instead to offer 401(k) plans to help employees save for retirement1. And even 401(k) plans are shrinking. With the recent recession, many employers have discontinued the practice of providing a company match contribution for 401(k) plans they offer. However, some employees are concerned about putting all their retirement eggs in the stock market, given the recent depreciation of stock values.

If your employer does offer a pension plan and you are concerned about your company’s future, you do have some protection. The Pension Benefit Guaranty Corporation (PBGC) was created under the Employee Retirement Income Security Act (ERISA) to function as America’s pension insurance program. Funded by employer premiums, the PBGC helps to protect American workers by encouraging the continuation and maintenance of private-sector defined benefit pension plans. The question is, will the PBGC hold up under the weight of excessive claims?

The PBGC covers almost one and a half million Americans whose employers have gone out of business. The recent demise of Circuit City provides an example: 21,000 former workers and retirees of the nationwide electronics retailer based out of Richmond, Va., will receive their pension benefit even after the company’s bankruptcy and liquidation, thanks to the PBGC2.  Fortunately, according to current calculations, the PBGC can manage the current burden of claims, but it will have to address a projected shortfall in the future3.

There are limitations on PBGC guarantees. If you have a sizable pension, a good portion of it may not be protected. For plans terminating in 2009, the maximum guaranteed monthly benefit for a 65-year old is $4,050 for a joint payout and 50 percent for a survivor payout.

Jobs in the public sector are noted for their generous retirement plans, but PBGC does not cover state and local pension plans. Testimony before the Joint Economic Committee indicates most states have sufficient assets available to fund their liabilities right now, and those that are struggling may still have sufficient time to recover and maintain their obligations for the future4.

If we can’t count on a pension plan or our 401(k), there’s always Social Security, right? For the time being, anyway. The Social Security Administration has reassured the public that Social Security is funded sufficiently to provide full benefits through 2037. However, unless changes are made, Social Security benefits will be reduced by 24 percent or more beginning in 2038, creating another compelling reason to take charge of your own retirement savings5.

What can you do to improve your financial position heading into retirement? First and foremost, consult an expert in money matters. A financial advisor can help you evaluate your personal financial situation and identify appropriate retirement strategies, including how to deal with disappearing pension funds. Another helpful step is to contribute to your retirement savings plan that is offered at work, even if your employer no longer offers a company match. The discipline of regular investing and the benefit from compounding savings can work in your favor. Look for ways to diversify your income, savings and investments and reduce your expenses so you are better prepared to live on less. As you continue to save, also consider insurance and investment products to help reduce risk. Market volatility is real, but history has shown us markets do rebound in time.

Kathy J. Bauers, ChFC®
An Ameriprise Platinum Financial ServicesSM practice
Ameriprise Financial Services, Inc.
3520 Silverside Road Suite 27 | Wilmington, DE 19810
Office: 302.543.5784 | Fax: 302.691.5645
Kathy.J.Bauers@ampf.com
www.ameripriseadvisors.com/kathy.j.bauers

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“In this depressed economy and a national distrust of finance people, I’m fortunate to have a wonderful relationship with my advisor, Kathy. It’s one less time-consuming task for me to do; she’s the expert and offers advice best suited for my situation. Thank you, Kathy.”    ~Dianne K. Independent Contractor, Dallas, TX

1 Majority of Fortune 100 Companies Offer Only Defined Contribution Plans to New Salaried Employees, Watson Wyatt Analysis Finds, watsonwyatt.com, May 11, 2009.
2  PBGC Assumes Circuit City Retirement Plan, PBGC.gov, May 27, 2009.
3 U.S. Insurer of Pensions Sees Flood of Red Ink, nytimes.com, May 20, 2009.
4 State and Local Government Pension Plans: Current Structure and Funded Status, Statement of Barbara D. Bovberg, Director of Education, Workforce, and Income Security, United States Government Accountability Office, July 10, 2008.
5 Frequently Asked Questions About Social Security’s Future, ssa.gov, May 11, 2009.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

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