Death of the Pension

Pension plans are quickly becoming a thing of the past. Less than half of the 100 largest companies in the U.S. are still offering traditional pensions to new employees, and more than 16 companies have froze pension contributions this year. This means that 401(k) plans and other contribution plans will continue to grow, even as 401k plans have received much criticism in light of the worst financial crisis to hit the U.S. in 70 years.

401(k) Plans Require Individual Attention

401(k) plans were once simple and effective in terms of retirement investing. You would save, and enjoy the proceeds at retirement. Things are different today. There is a shift towards putting more emphasis on the individual investor to manage their own investments, including asset allocation and defensive plays during economic downturns.

But does it really work this way? Most likely not. 401(k) plans can be extremely tricky, and most contributors have no real training on how to manage or balance their risk. As a result, most 401(k) plans lost about 45 percent in the last year alone.

Pension funds have also lost a large amount of institutional money. The impact on older workers is devastating. Many are now hoping to work for as long as they possibly can instead of planning their retirement. An early retirement is entirely out of the question.

Among the largest criticism of 401(k) plans is the volatility of the markets its invested in, along with a lack of transparency and individual knowledge. Corporate and Wall Street greed have pushed up multiples for stock valuations, and even ratings companies have no idea how complex financial products work.

This is bad news for everyone, as investors are now afraid to reenter a market that is seemingly unregulated and consequences go unpunished.

Rise of the Hybrid Retirement Fund

But while older workers may still be able to depend on their pension plans for now, new workers will have to rely solely on their 401(k). What should they do to make up for a lack of a pension? The answer may be a hybrid plan. These plans will most likely combine characteristics of defined-contribution and defined-benefit plans. This is the very first time hybrid plans outnumber traditional plans among those who have defined-benefit plans.

How have your savings/retirement strategies changed due to the financial meltdown? Are you holding long, or making short term plays to regain lost value?