Changes in the Retirement Planning Landscape

VaselineSeptember 6, 2024

0 3 minutes read

Changes in the Retirement Planning Landscape

My clients, Remington and Kimberly, are in their 30s with one child and a second on the way. Both have great jobs and pay well above minimum wage. As modern workers, however, their employers do not provide them with a retirement plan sufficient to support their retirement lifestyle.

This now commonplace situation is the result of a significant change in the retirement planning landscape since the late 1980s.

When I joined the workforce, a typical private company offered a defined benefit pension plan. This once upon a time plan is now a rarity, especially in the private sector, marking a significant shift in the retirement planning paradigm.

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We moved from a defined benefit plan to a defined contribution planmeaning that the burden of saving and investing has been shifted from employers to employees like Rem and Kim.

Defined benefit plans

From the 1940s to 1987, the number of workers covered by the pension increased from 4 million to 40 million.

These defined benefit plans specifically outlined the amount of income workers would receive from their employer, eligibility requirements, and the length of time they would receive benefits once they retired.

Pension companies had entire departments and staff to understand money and investments, what they needed to do, how much they needed to save and how best to invest to provide their employees with the agreed upon pension.

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Defined contribution plans

In 1978, Congress enacted the Internal Revenue Code 401(k) as part of the Revenue Act of 1978, introducing the concept of a defined contribution plan. These plans outline how much of their salary the employee can contribute to an employer-sponsored retirement plan and what match, if any, the employer will provide. They also describe the calculations used to determine when and how much you can contribute, and when you are eligible to receive distributions from these plans.

Now, employers could offer a tax-deferred retirement savings account that gives employees fund options. Employees could defer a certain percentage of their income (depending on many variables), and many employers may defer a small portion of what the employee defers. Then, the employee can choose how to invest the deferred income from the funds provided by the employer. The employer must follow strict guidelines in establishing and overseeing available investments.

A new paradigm

Creating and managing an employer-sponsored defined benefit plan is expensive and labor-intensive for an employer. While a 401(k) still takes effort to manage, it’s generally not as expensive as a defined benefit plan.

The decline of traditional pensions in favor of defined contributions means that the employee bears the burden of choosing their investments from those offered by the employer and bears the risk of market volatility. There are no requirements, or at best minimal requirements, for income deferral, and even those employers who set guidelines are clear that without professional help there should be no expectation of a guaranteed income after retirement.

This underscores the importance of why high-wage earners like my clients Remington and Kimberly need to seek professional guidance in independent retirement planning. There is so much noise out there, determining what information applies to you, what is relevant to your situation, and what options are in your best interest is challenging at best and nearly impossible at worst.

When it comes to retirement planning, it is now in the hands of the employee and requires due diligence, financial savvy and awareness of existing professional landscapes. If you don’t have the time or interest to go that route, your best option is to work with a fee-only fiduciary financial advisor. Remington and Kimberly chose this direction and it will pay off for them and their family.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

VaselineSeptember 6, 2024

0 3 minutes read

Vaseline

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