Pension Picking: Help Your Employees Boost Retirement Savings. (Management Advice)

By Korn, Donald Jay | Black Enterprise, March 2003 | Go to article overview

Pension Picking: Help Your Employees Boost Retirement Savings. (Management Advice)


Korn, Donald Jay, Black Enterprise


Business owners who want to offer a retirement plan to their employees might want to pay attention to reruns of That '70s Show. "Trustee-directed defined contribution plans became popular in the 1970s" says Garry W. Bridgeman, a certified investment management analyst (C.I.M.A.), and First vice president, investments, with Merrill Lynch in Atlanta. "They're not used as widely now as participant-directed 401(k) plans, yet they have certain advantages."

To understand those advantages it's necessary to distinguish between the two main categories of employer-sponsored retirement plans:

* Defined benefit (DB) plans. These are traditional pension plans where the employer promises to pay retirees a certain amount of money in the future, based on annual compensation and years of service. DB plans generally work best for employees who put in 20 years or more with the same employer. Employees who change jobs in mid-career may not get much, if anything, from a DB plan, so such plans may not help attract and retain young workers today.

* Defined contribution (DC) plans. Here, no specific pension is promised. Instead, money is contributed to each worker's account and the ultimate payoff depends on how well that money was invested.

Recently popular 401(k) plans fall into the DC category. These plans, however require employees to fund most of their retirement themselves. Those who don't, participate will not build up a nest egg. Moreover, not every employee will invest prudently. Some will be too conservative and wind up with a small retirement fund, while others will be too aggressive and lose savings, for example, those who loaded up on overpriced tech stocks at the peak of the last bull market.

"Another form of defined contribution plan might be preferable," says Bridgeman. "Studies indicate that trustee-directed defined contribution plans have outperformed participant-directed plans by three to four percentage points a year." In fact, a trustee-directed DC plan, such as a profit sharing plan, may offer the best of both worlds. …

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