By Jennifer Gomori, MAPE Editor

Having a pension is an important part of a successful retirement savings plan, but something many employers are taking away from their workers and replacing with 401k plans. MAPE works hard to maintain Defined Benefit (DB) plans, a type of pension plan, for its members.

When 401k plans were introduced to employees in the 1980s, it was never the intent of early backers that these would replace pensions.

“401k’s were not designed to take the place of (pensions),” said MAPE Executive Director Fred Timpner. “If all people have is a 401k and Social Security, that will not be enough to maintain the lifestyle they’ve become accustomed to.”

President Stuart E. Raider (left) and Partner Peter M. Mendler of Raider Dennis Agency.In an effort to save money, employers are substituting these market-based plans for pensions. The problem is market volatility can negatively impact 401k savings compared to the steady growth of a DB plan.

President Stuart E. Raider (left) and Partner Peter M. Mendler of Raider Dennis Agency.

“(Pensions are) the most important part because they’re not environmentally changed,” said Stuart Raider of Raider Dennis Agency. “The Defined Benefit is a payout based on a formula, like Social Security. Social Security is the cornerstone of most people’s retirement, although most police and fire aren’t eligible to receive this benefit.”

That makes DB’s even more important to public safety employees, assuring them a certain amount of money will be set aside for their retirement. The plan is ‘defined’ because the formula for calculating the employer’s contribution is known ahead of time. However, DB’s are different from other pensions, where the amount of payout depends on the return of the funds invested. If there is a shortfall from investments set aside to fund the employee’s retirement, employers must make up the difference.

“One of the advantages is the Defined Benefit puts all of the responsibility of the risk on the employer,” Raider said.

But that doesn’t mean DB plans will become a hardship for the employer, Timpner said. “If a DB plan is properly funded by the parties, then there could be minimal or no cost at all to the employer,” Timpner said. “For example, the City of Sterling Heights went years without putting one cent into the pension fund. There were no employer contributions due to the fact that the pension fund was overfunded.”

Some employers are opting instead for Defined Contribution (DC) plans, which are 401k plans. DC plans allow employers the option of making contributions at their discretion and they don’t assume any of the market risks of losses - the employee assumes all the risks. Another drawback of DC plans for employees is that they are accessible to workers before they retire, unlike DB plans.

Are You Ready To Retire?

President Stuart E. Raider (left) and Partner Peter M. Mendler of Raider Dennis Agency.

Many of us think age dictates when we retire, and it does in those jobs/professions that have mandatory retirement ages. Some of us have pre-set ages in our minds; 55, 60, 62, 65. These ages can be based on reaching a certain number of years of service (i.e. 30 and out) or when your mom or dad retired; what your spouse expects, or tradition. But the question is.....are you ready?

There are two viewpoints to consider with this question: The inner you and the financial you. Both are equally important.

The Inner You

This is the area of ego (especially for us men), emotion, psychology, feeling productive, etc. We have worked all our adult lives, contributed to society, made the world a better place, and now we are done. The sudden end to the positive feelings we get from being productive can be difficult to deal with. What makes me important if I don’t have my career? Or what makes me significant if I’m not bringing home the paycheck? We must remind ourselves that we still have important meaningful roles to fulfill as spouse, parent and grandparents - our best roles! We can become invaluable assets to charities, such as churches, hospitals and children’s organizations.

What we have observed that what works best is to have some type of passion that occupies at least a part of the 168 hours God gives us every week and also occupies a portion of our minds.

When clients come to see us near retirement they will tell us of the thing that they will throw themselves into (i.e. golf) and will do this every day (36 holes a day!). Guess what happens? After two or three months (or four or five) they are sick of the activity. So when people tell us they are going to retire, we always engage them in two different, but equally important questions.

1. Are you aware retirement is an irrevocable decision? Once you retire, if you change your mind in six months your job will probably not be waiting for you. Be sure of your decision!
2. Imagine tomorrow is you first day of retirement. What does it look like? What are you doing? How do you feel?

If you are planning to retire in the next year think about these questions very thoughtfully. It is critically important that you mentally prepare for retirement just like you would a marathon or big test.

Pre-retirement counseling, insurance information

Preparing for the future is essential for today's public employees, particularly in an era when they are able to retire younger than ever before. That is why the Michigan Association of Public Employees (MAPE) offers its members, without charge, pre-retirement counseling emphasizing pension maximization.

Professional financial planning is offered at no cost to all members via a professional relationship with expert Stuart Raider of Raider Dennis Agency. He assists MAPE members in such vital areas as pre-retirement planning.

Defined Contribution Retirement Plans

Many employers offer some form of defined contribution retirement plan. Although the name may vary (401(k), 403(b), 457(b))1, on a basic level they all function in much the same way. During your working years, money is automatically deducted from your paycheck and contributed to the plan. The accumulated funds are ultimately used to help pay for your retirement.

Why Participate?

The answer to this is simple: you’ll likely need the money. With people living longer, more money is needed to pay for retirement. And two of the traditional financial pillars of retirement, defined benefit pension plans (providing a known benefit) and Social Security are playing a smaller role in meeting this increased need for retirement income.

Over the past several decades, many employers have changed from defined benefit to defined contribution plans. From 1985 to 2000, for example, the rate of participation in defined benefit plans by full-time employees of medium and large private firms dropped from 80% to 36%.2 Social Security also faces problems. As the baby boom generation enters retirement (the so-called “silver tsunami”), the number of individuals remaining in the workforce to support these retirees grows smaller. Although politically unpleasant, harsh fiscal realities may force increased payroll taxes, reductions in benefits, or both.

What to Do?

Today, to a greater extent than ever before, you’re on your own. One starting point is to take a more active role in your employer’s defined contribution plan:

  • Investment options: Or, where do I invest my money? This will depend on a number of factors, including the plan’s available options, the amount of your retirement income goal, the number of years until retirement begins, and your tolerance for risk.
  • Contribution rate: A 3% rate may be the default, but is that enough to meet your needs? Another factor to consider is whether there is an employer match for part of your contributions. At the least you should contribute to the level which will maximize the employer match. Otherwise, you’re walking away from “free money.”
  • Annual checkup: Everyone’s situation changes over time. Make sure that you conduct a thorough review of your retirement plan at least once a year. Are you saving enough? Are your investments still appropriate?

Seek Professional Guidance Successful long-term investing requires discipline and patience. The guidance of a financial professional is highly recommended.

  1. These refer to the sections of the Internal Revenue Code which authorize the different types of retirement plans.
  2. See, “Employee Participation in Defined Benefit and Defined Contribution Plans, 1985-2000.” U.S. Bureau of Labor Statistics, updated June 16, 2004