Defined Benefit Pension Plan Problems
For many years, the defined benefit pension plan was the gold standard of retirement plans for employees. Because these plans have had some problems through the years, many companies have gone to defined contribution plans, such as the 401k. If you have a choice of whether to get involved with a pension, be aware of some of the potential problems.
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Defined Benefit Pension Plan
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The defined benefit pension plan is a type of retirement plan that some employers offer as a way to provide for the retirement of employees. With a defined benefit plan, after working for a certain number of years you will receive a fixed amount of retirement benefits. You do not have to contribute anything out of your paycheck and you do not choose the types of securities into which your money will be invested.
Lack of Potential
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One of the potential downsides of a defined benefit plan is that it offers no room for improvement. By comparison, if you saved your own money in an investment plan, you could potentially outperform the pension plan, ensuring a more comfortable life during your retirement years.
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Plan Changes
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Another potential problem with defined benefit plans is that they can be changed by the company that offers them. Since you do not actually have an account with money in it, the money is still in the control of the company that offers the plan. The company could decide to freeze the assets or stop the plan completely. If you are close to retirement when the plan is changed, it could be devastating for your financial future.
Fixed Payments
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Although a fixed payment in some cases might sound attractive, rising inflation could leave you without enough money to live comfortably. When you retire at the age of 60, you could still live another 20 or 30 years. Over the course of 30 years, inflation typically increases substantially and your fixed payment may not provide enough money.
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