GUARANTEED – That’s a key word in qualified retirement plans and there are many flavors that an employer can choose from.
– Defined Benefit Pension – Money Purchase Pension
– Profit Sharing Plan – 401(K) Plan
– Simplified Employee Pension – Simple IRA
The Covington News Publisher T. Pat Cavanaugh does not have enough paper on hand to print all of the regulations, participation, contribution, vesting, administration and distribution requirements these plans require! Let’s focus on the basic plan mechanics, what they are designed to do and who contributes.
Defined Benefit Plans and Simplified Employee Pension Plans (SEP) are funded solely by employer contributions. A Defined Benefit Plan promises a specific benefit to be paid at retirement according to a selected formula. Contributions to SEP plans are determined annually by the employer as is the amount.
There has been a lot of adverse press directed at Defined Benefit Plans due to the financial strain placed on the employer. To me, that’s an excuse to shift the blame away from the employer who failed to fund what was promised by the plan. Sounds a bit like what has been done to Social Security by several Congresses, doesn’t it?
A Money Purchase Pension Plan does require employer contributions based on the formula written into the plan, but employee contributions are permitted. Profit Sharing Plans, 401(K)
Plans and Simple Plans allow discretionary employer contributions. That has been a problem over the past seven years as the recession has caused employers to reduce or suspend their plan contributions. Employee contributions are permitted up to the maximum limits.
Regardless of your retirement plan, do you know how much risk you have in your account? That’s a very important question and if you don’t want to risk your funds, the market is probably not where you need to be. On the other hand, if you are willing to risk a loss in exchange for the possibility of greater returns, there is nothing wrong with staying in the market.
A strong example of how risk can damage your retirement plan happened in 2008 and 2009. It’s common knowledge that I am no fan of the economic policies of the current President and I didn’t see a lot of positives from the eight Bush years either.
If your retirement plan dropped 25 percent in that year and a Required Minimum Distribution (RMD) had to be taken, your account took a serious hit. Fortunately, the 2009 RMD was made optional. Recovering from a loss of that magnitude will take several years. You would need a three year return of 10 percent annually to erase the loss.
In a Lifetime Income Survey conducted earlier this year, 48% of the respondents agreed that having guaranteed income to cover living costs should be a primary goal for their retirement plan.
Here’s where annuities enter the mix. If it’s important for part or all of your retirement income stream to be guaranteed, remember that annuities are the only way to generate retirement income that you can’t outlive.