How to Effectively Save for Retirement in Fortune 500 Companies
The largest-sized Fortune 500 companies in America have seen a dramatic shift away from traditional defined benefit (DB) pension plan to defined contribution (DC) plans. This is a result of trying to implement cost savings and accomodating today’s increasingly mobile workforce.
In 2017, only 16% of Fortune 500 companies offered a DB plan to new hires, down from 59% among the same employers back in 1998.1 But, 51% of these companies still employ workers who are actively accruing pension benefits, and 93% of those who sponsored a DB plan in 1998 still manage plan obligations and assets. Given this change in the retirement landscape, how you effectively save for retirement in Fortune 500 companies really depends upon your generation.
Savings by Generations
There are important savings options for retirement by generation. Those approaching retirement might already have a pension plan that they have been enrolled in, and the younger workforce of millennials, may not have the opportunity of a pension especially now in corporate America.
There is a generational difference in saving, with a study revealed those aged between 18 and 37 – Generation Z and millennials, are saving nearly 16% of their annual income for retirement, including employer contributions.2
Meanwhile, those aged 38-70, Generation X and baby boomers, were putting aside less at around 14-15% of their earnings. Younger investors were also the most likely to be convinced to increase their savings amounts (97%), compared to just 82% of those aged 51-70.
However, Generation Z and millennials showed higher levels of anxiety when thinking about how to save for retirement, with 12% saying these worries led them to put off thinking or doing anything about saving. This stood at between 7-10% for older generations.
It appears unlikely that much of the younger generations will be able to take advantage of pensions when working in Fortune 500 careers, so they must rely exclusively on 401(k) plans.
Company 401(k) Plans and Pensions3
Traditional pension plans are defined benefit pension plans, which guarantee that employees receive a certain amount upon retirement regardless of their investment’s performance. This ensures that employees receive a predictable income each month once they reach retirement age. The amount they receive may be a fixed dollar amount multiplied by the number of years of service, or it may be based on a formula that factors in the average of their final years of salary.
A 401(k) is known as a defined contribution plan. Unlike a defined benefit plan, this plan type doesn't guarantee employees any form of payment in retirement. Employees contribute a certain percentage of their earnings to an account created by the employer, and employers can contribute a partial or full match of the employee contribution to the account. Contributions are usually invested, and the account balance from which the retiree makes withdrawals will be the investment gains or losses.
With a 401k plan employees are encouraged to make contributions to their investment account to build up their retirement nest egg. Most Fortune 500 companies offer generous matches or a percentage of contributions. The incentive is that your 401(k) can be rolled into another account, such as an IRA, if you leave the company. You can take this retirement fund anywhere you go and continue to accrue funds with tax benefits.
When should you enroll in a pension plan?4
This can be a difficult choice. If you need income security in retirement, I would enroll in a pension. If you have limited fixed sources of income in retirement, the guaranteed income stream provided by a pension plan may be extremely appealing. With a 401(k), there's no limit on how much your account can grow—or decline—in value. If it declines enough, you could outlive your balance, but you can receive a pension for the rest of your life.
If you intend to stick with the same company for a long time a pension plan is a good option. If you intend to spend several years or even your entire career at one company, it may make sense to participate in the pension plan. This is because you are more likely to become fully vested in the plan, which would entitle you to use all of the benefits that you accumulate in the plan.
When should you enroll in a 401(k) plan?
You may want the tax-advantaged option of a 401(k) plan. A 401(k) plan allows you to contribute pre-tax dollars from your paycheck to the plan, which reduces your taxable income. This strategy may be desirable if you are currently in a higher income tax bracket and expect to be in a lower tax bracket in retirement. With a 401(k) plan, you can switch companies as often as you like and your savings will still be there. Pension plans may be subject to freezes, which prevent new enrollees in the plan, and buyouts, whereby employers offer a lump-sum payment to reduce the financial burden of long-term payouts. As discussed above, 401(k) plans are replacing pension plans, so they are going to remain a viable retirement savings option for many.
The Bottom Line
If given the opportunity to enroll in a pension plan this is a great opportunity to save for retirement. It provides a set amount of money at retirement. But you have to be committed long term to the company. I would, however, supplement the pension with a defined contribution plan such as a 401(k) if it is offered as well in your company. If not, save in an IRA to maximize your retirement savings. I would not just depend upon a pension to fully fund your retirement. It is better to be proactive and save additional money in a defined contribution plan or IRA to further your retirement savings.
1. https://www.willistowerswatson.com/en-US/Insights/2018/02/evolution-of-retirement-plans-in-fortune-500-companies?
2. https://www.cnbc.com/2019/11/20/why-young-people-are-saving-more-for-retirement-than-boomers-and-gen-x.html
3. https://www.forbes.com/sites/forbesfinancecouncil/2018/11/13/planning-for-the-future-four-changing-retirement-trends/#7bd193738023
4. https://www.thebalance.com/what-is-a-pension-plan-2385771
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
