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No Pension? No Problem!

A new study by the National Institute for Retirement Security (NIRS) indicates that more than two-thirds of American workers are so anxious about their retirement prospects that they are willing to forgo salary increases for guaranteed money in retirement. Having been given the opportunity to be in charge of their retirement future, the vast majority now want to hand control back to their company, even if it costs them.

In a recent feature for The Suit magazine, Compass Investors examined the dangers of what we call the “deer-in-the-headlights” syndrome—the paralysis that takes hold when workers are faced with the perceived complexity of managing their 401(k) account, knowing that they are solely responsible for ensuring they have put enough money away to last the rest of their life once they stop working. The present survey would seem to confirm that a majority of workers feel like they’ve been turned into deer and set loose on a busy highway.

But would a return to a pension plan—even if it were an option—be a wise choice? Consider the following two scenarios that suggest the only “sure thing” trading in salary increases for a pension would provide may be a lowered standard of living now and throughout retirement.

Traditional Pension Scenario: If you agree with majority of the NIRS survey respondents, you would willingly sacrifice your pay increases (forget about that nicer vacation), and instead have your company invest that money for you. However, giving away this control is not without risk and sacrifice. First, pension programs (especially in the public sector) run the risk of being underfunded and therefore, may not be available to you when you expect. Regardless, when you do retire, you have little choice when it comes to the pension payout. Pensions are essentially annuities. You must decide upfront, from a limited number of options, how much and when to begin your payments—decisions that cannot be changed once made. And the “right” choice can really only be made if you have a crystal ball and can know how long you are going to live. Finally, once you (and if applicable, your beneficiary) die, the payments stop and there is nothing left to pass on to your estate.

401(k) Scenario: You keep your salary increases, which in turn results in more contributions to your 401(k) plan since the amount is calculated as a percentage of your salary. Combined with even a moderate investment return, you have an excellent chance of having a greater portfolio balance to look forward to. And when you retire, YOU are in complete control. You now have a countless number of possibilities when it comes to what to do with that money. For example, you can roll over your 401(k) into one or more IRAs that provide greater investment flexibility. You can take your required minimum distributions—or more if you prefer—from your 401(k) or IRA, continue to grow and protect the balance, and then have the ability to pass on the remainder on to your estate. And, if you want, you can always choose to annuitize your final plan balance and create your own pension.

The difference is clear: with proper guidance in managing a 401(k) plan effectively, American workers will have more choices, added flexibility and control of their accounts—both while they are working and during their retirement—and gain the confidence to take over the reins of their retirement future.

Kevin L. Coppola, President, Compass Investors, LLC

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