Forward Thinking: Why employees and employers need new solutions to protect their wealth
Smart Business September 1, 2014
Pension plans have become a headache for employers who were already struggling to find enough cash to keep up with expenses.
While it’s great that people are leading longer and healthier lives, the result is pension funds that are being stretched to the breaking point — and beyond.
“People live longer and draw on these pensions longer, but there are fewer workers paying into these funds,” says Timothy J. Gallagher, an associate at Kegler, Brown, Hill + Ritter.
“So you get a gap between what is being paid out and what is being paid in.”
Employers have come up with a variety of ideas to deal with the situation.
Some have tried to drop out of the pension plan completely, only to realize that they couldn’t escape their contractual responsibility.
“If you are participating in a multiemployer defined pension plan and you as the employer try to leave, you may have what is called withdrawal liability,” Gallagher says.
“The company that is no longer participating has to pay for unfunded vested benefits, which amounts to the balance of what they owe to the fund, but have not yet paid into the fund.
“An employer’s withdrawal liability occurs whether the employer withdraws completely from a plan, or just in part,” he says. “If all the employers in a plan withdraw completely at the same time, there are still withdrawal liability consequences. Basically, you can’t get out of it completely.”
Smart Business spoke with Gallagher about what employers can do to deal with this growing problem.
How can employers deal with rising pension costs?
One option is to determine what you owe and take out a loan for that exact amount at a more affordable interest rate. If you have the credit to take that option, it could be a good solution. It stops the bleeding and caps your liability at a fixed point.
You feel that your income can cover your day-to-day expenses, but as the people drawing on these pensions live longer, your contributions to these funds continue to expand. As companies continue to grow, they have to start thinking about their readiness to handle this issue down the road. If they are proactive, they can confront their future head-on and have a solution in place to deal with it.
If your company is participating in a multiemployer pension plan, it’s very important that you consult with someone who works in this area of the law. There are certain rules and exceptions depending on what industry the employer works in, and how much and how quickly the employer withdraws from a plan. Good advice will be worth its weight in gold.
Are pension plans on the verge of becoming extinct?
Employers will not take this option away completely because it is still an important benefit to entice top-quality employees. Unions will likely keep them as well because it is a benefit that they want to offer to members and potential members. The problem is the funding method used to support these programs. There needs to be a change in the rules for how these plans work and how they are funded.
In the future, you will see changes that give pension plans more stability, which may come with a slightly diminished return for employees. The best case scenario is that the changes will lead to something they can count on, and they won’t have to worry about whether or not their pension will be there when they need it.
What is the message for employees both now and in the future?
With so many burdens on the pension system as it stands today, future retirees need to understand that their pension is not going to be their parents’ pension. It is the same problem with Social Security. Employees should consider planning for retirement outside of their employer, or find ways to manage their wealth individually.
Employees who still have pensions through one of these plans need to be informed about where the money is invested. If they are in big funds that are underfunded, they need to consider taking other measures to protect the wealth and income they are accruing.