Another Nail in the Defined Benefit Coffin?

February 1st, 2008

Already this year, there is bad news for pension funds. According to Mercer during the first month of 2008 pension funds for American companies have lost $110 billion, which equates to about 8 percent of their value. That is a pretty heave hit for plans that have already been struggling. In effect, this hit wipes out these fund’s gains from 2007.

With the changes that DB plans must make to comply with the PPA and the declining equity markets, companies will continue to struggle to fund their plans and look at ways to decrease their obligations.

Everyone seems to have read or heard about the retirement crisis that the U.S. faces. The traditional DB pension plan has been in trouble for some time. As an illustration, in 2006 IBM announced that as of January 1, 2008, participants in their DB plan would not accumulate any more benefits. When IBM made this announcement their plan was fully funded and IBM was strong. Other companies such as UAL had already ended their plan prior to the IBM announcement.  

With a potential recession on the horizon and pension funds continuing to struggle, what does this mean for the traditional defined benefit (DB) pension plan? The bottom line is that the traditional DB plan from large employers is on the downturn. Employers and employees will need to look at other creative ways to fund their retirement dreams.

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