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How does the Wall Street meltdown affect my pension?

In the past few days, large companies on Wall Street have been closing left and right, making the people who work at these companies jittery about many issues, including their retirement security.

The good news for these employees is that the money in their pension and 401(k) plans is protected from creditors, so that even when a company goes into bankruptcy, they don't have to worry about their retirement money being used to pay back debts instead.

Furthermore, if you're worried about the value of your company's pension plan because it may contain too much of your own company's stock, a little-known provision of the Employee Retirement Income Security Act of 1974 (ERISA) prevents companies from investing more than 10 percent of plan assets in their own stock.  So, if you were a participant in the Lehman Brothers defined benefit pension plan, ERISA protects you from a potentially catastrophic Enron-like loss of your retirement funds.

Unfortunately, the same protections aren't in place for your 401(k) and other defined contribution plans so if your money is invested in your company's stock, it isn't as safe.  But, a provision of the 2006 Pension Protection Act allows participants who have worked at their company for three or more years to shift investments out of employer stock and into other investments offered by the plan.

Generally, the Pension Rights Center doesn't like to give out investment advice, but even a novice knows that it isn't a good idea to put all of your eggs in one basket.

Comments

Pension will no doubt turn out to be the great retirement stabilizer. Employees who have them or who can look forward to receiving one probably sleep better at night.

It is important to note that, although what is happening on Wall Street is not exactly good, it is not exactly bad either. It offers us further proof that under-regulation is not something that works.

Meanwhile, back on Main Street, company bankruptcies and under-funded pension plans can mean less than is expected. Although the PBGC is guaranteeing that pension (up to a certain amount), they too have embraced more risk that is necessary. I recently wrote about this new investment behavior. (http://retirementwithaplan.wordpress.com/2008/08/25/retirement-planning-...)

What we need is to not wholly rely on the pension but do a much better job with debt management and use investments such as IRAs and, as many companies do, contribute to 401(k) plans for pension employees.

Hope this helps.

Best,

Paul Petillo
Managing Editor/BlueCollarDollar.com
http://bluecollardollar.com
http://retirementwithaplan.wordpress.com

The following statement in the article will be misleading to anyone who is not a pension/benefits specialist (and I have met more than a few benefit specialists who would be confused as well): "Furthermore, if you?re worried about the value of your company?s pension plan because it may contain too much of your own company?s stock, a little-known provision of the Employee Retirement Income Security Act of 1974 (ERISA) prevents companies from investing more than 10 percent of plan assets in their own stock."

While the article goes on to distinguish between DB and DC plans -- the statement may be where they stop reading / understanding what is being said.

Editor's Note:
That’s a good point. Traditional pension plans, also called defined benefit plans, are not allowed by law to invest more than 10 percent of the pension plan’s assets into the stock of the company that sponsors the plan. This is in contrast to 401(k)s and other individual account plans where there is no limit to how much employer stock goes into an individual account. Many employers sponsoring 401(k)s match employee contributions exclusively with company stock, and Employee Stock Ownership Plans (ESOPs) are generally comprised of 100 percent of company stock. I hope this clears up any confusion.

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