The recent stock market crash has left many retirees wondering if there is an effect stock market has on pension funds. The truth is, retirees with an assured pension program are the least hit by the downturn in the stock market. Unlike their counterparts with 401(k)s or other retirement plans, retirees with defined-benefit pension plans do not have to worry about their benefits being affected by the weak economy.
Stock Market Crash and its Effect on Pension Funds
In a defined-benefit pension plan, it is the responsibility of the employer to assume the risk of investments and to see that employees get their benefits no matter what happens to the investment. The employers ensure the stable growth of their pension funds by investing a major portion of their assets in stock because in the long run the stock market provides the best return on investment. In fact, when the economy was in good condition most pension funds had a surplus in their accounts. However the stock market crash eroded the value of pension funds and as of 26, July 2010, the aggregate shortage of all pension plans in the S&P 500 Index is a staggering $227 billion. According to Hewitt Associates’ Pension Risk Tracker, the funded ratio of all pension plans in the S&P 500 Index was around 80% at the end of June 2010. This means that the value of assets in the funds are 20 percent short of covering the benefits due to the employees.
Guaranteed Pension for Retirees through the Pension Protection Act of 2006
Pension Funds- What the future Unfolds
Unfortunately, the Pension Protection Act of 2006 while protecting the rights of retirees with defined-benefit pension plans, acknowledged also the fact that defined-benefit pension plans are on their way to oblivion. More and more companies are adopting defined-contribution plans like 401(k)s, which puts the risk of investment on employees and makes them in charge of their retirement plans. The recent market crash and its effect on the pension plans may be another factor which speeds up the demise of pension plans.
- United States Dept. of Labor www.dol.gov/EBSA/pensionreform.html
- Hewitt Associates’ Pension Risk Tracker https://rfmtools.hewitt.com/PensionRiskTracker/
- Suffolk University Law School on The Pension Protection Act of 2006 https://www.law.suffolk.edu/highlights/stuorgs/lawreview/documents/Eriksson_Note_FINAL.pdf
- Investopedia Website https://www.investopedia.com/terms/p/pensionplan.asp
Image Credit: Walter Rodriquez, https://www.flickr.com/photos/91571281@N00/728933695/