Defined Benefit Plans and The Time Of Our Youth

My father and aunt grew up in Israel after its independence in 1948 and they both lived there for about a dozen or so years.  My aunt vividly describes her experience in much more fonder terms than my father does. My father notes that in early Israel, there was food rationing and times were tough. My aunt talks about it differently and glosses over the hardship because that time was the time of her youth. We often look fondly on the past and gloss over the tough times because it was a time when we were young.

To be honest, while I grew up on Intellivision, I would rather have had a Wii in those days.

While recent stories and critics have pointed out the shortcomings of 401(k) plans, an interesting article by my friend Chris Carosa in Fiduciary News asks whether it’s time to bring back pension plans. While styles do come back and bellbottoms did, ruffled shirts from the 1970’s and defined benefit plans will not. Thanks to financial concerns and regulatory burdens, employers will not be shifting funding retirement from the employee to the employer.

While defined benefit plans are celebrated with much lore, they weren’t great benefits for those employees who didn’t have them. For those that did have them, they had 10-20 year vesting schedules (prior to TRA 1986) and pensions may be partially lost if the PBGC had to take over the Plan and fully lost prior to the enactment of ERISA (ask the folks at Studebaker).

 Defined benefit plans were staples of larger companies, unionized industries, and governmental workers. Small businesses, the staple of this country’s economy did not have access to low cost retirement plans because the plans in place at that time were employer contributory and therefore likely cost prohibitive. Thanks to 401(k) plans, simplified employee pension plans, and SIMPLE plans, many small businesses now have access to low cost retirement savings plans that they couldn’t sponsor 35 years ago.

So while defined benefit plans are terrific benefits, I think more employers have greater access to offering retirement plans. If you have data to prove otherwise, I am willing to admit I’m wrong.

I have never been covered by a defined benefit plan and I might never be covered by one and I am fine with that. While it would be nice if all employers would shift back to pension plans, so would world peace. I’m not holding my breath for either.

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3 Responses to Defined Benefit Plans and The Time Of Our Youth

  1. Ary: as always your position’s are thought provoking. I’m going to send it out to a group of my clients and their financial consultants.

    • Ary, you may get sufficiently successful that marginal tax rates really irritate you. Your best tax shelter at that time will be a defined benefit pension plan.

      But, you’re young, and don’t yet see every possibility before you.

      • admin says:

        Robert,

        As they said in one of my favorite movies, “The Shawshank Redemption”, “Hope is a good thing, a very good thing.”

        I hope my pratice will be successful enough to maintain either a defined benefit plan or a cash balance plan. I am open and hopeful for the possibility.

        Thanks.

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