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Where Did Pensions Go?

Where Did Pensions Go? Fitzwilliams Financial

Before 1978, most retirement plans were set up as pensions. Although the term “pension” can colloquially refer to any kind of retirement account, usually what is meant by “pension” is a defined-benefit plan.[1] “Defined-benefit plan” is a technical term for a retirement plan where an employer guarantees payment of a certain amount when you retire based on how long you worked at the company and what your salary was at that job.[2] With pensions, the burden of risk in setting you up for retirement was entirely on your employer because they were required to pay you an agreed-upon amount at retirement regardless of the pension fund’s return.[3]

So, what changed in 1978? Congress passed the Revenue Act of 1978. This act added a provision to the Internal Revenue Code called “401(k).”[4] This provision added a new tax-advantaged way for employees to defer a percentage of their compensation to avoid taxation.[5] The name of that provision is actually the origin of the term “401(k).”[6] After the introduction of the Revenue Act of 1978, a benefits consultant named Ted Benna developed a retirement plan based on that 401(k) provision.[7] After a few years, many major companies were offering 401(k) plans, and the 401(k) took off as one of the most popular retirement plans in the country, replacing pensions and altering the retirement landscape.[8]

So, what’s different with a 401(k)? A 401(k) is what’s called a defined-contribution plan.[9] This kind of account is primarily employee-funded, although it is possible for employers to make contributions to these kinds of accounts as well.[10] The employee is not guaranteed a specific payment on retirement–rather, they are allowed to set up an investment account themselves which has a tax-advantaged status that they are allowed to access when they reach 59 ½ (and in some cases, 55).[11]

Regardless of what kind of accounts you have, it’s not always clear how best to use them to maximize your retirement. If you’re curious about what a financial professional can do for you, reach out to us today for a complimentary review of your unique financial situation.

 

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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