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Central Pension Fund Sock
Market Turmoil While 401(k) plans may be suitable as supplemental retirement savings accounts for those who already have a traditional defined-benefit pension plan, they are extremely risky if they are your only retirement plan. The recent turmoil in the U.S. stock market shows why. History teaches that, over long periods of time, investments in stocks produce higher returns than investments in other instruments such as bonds, real estate or cash equivalents. But history also proves that the stock markets are subject to wide swings up and down, and it is impossible to predict when these swings will take place. For the 3½ years prior to June 1998 the U.S. stock market was providing regular returns in excess of 20%. But all of that came to a screeching halt last summer. Between June and September of this year, the Dow Jones Industrial Average lost 18% of its value. While young people might properly view this as a downturn that will average out over a 40-year working career, the problem is that, because you can’t predict when these downswings will occur, you may save and invest diligently for 40 years only to find that, on the eve of retirement, your nest egg has lost 18% of its value, and you can no longer afford to retire. For example, suppose that by June 1 of this year you had reached age 65 and had built a 401(k) account balance sufficient to provide a monthly pension of $1,000 a month for 17½ years--which is the current life expectancy at age 65. You had determined that, together with Social Security, you would need $1,000 a month to meet your retirement expenses. Unfortunately by September 1 of this year that account balance, if invested in the U.S. stock market, would have only been large enough to pay you a benefit of $820 a month. If you had set $1,000 as the minimum necessary to meet your retirement needs--you no longer could afford to retire at age 65 as you had planned. Worse yet, if you had retired in June with your $1,000 a month nest egg, you would have had to decide whether you could now meet your monthly expenses with only $820 or whether you would have to go back to work to rebuild your 401(k) account. With a traditional defined-benefit pension plan, like the Central Pension Fund and the plans negotiated by most IUOE Local Unions, your vested benefit has no exposure whatsoever to stock market risks. If you had a $1,000 vested monthly benefit in the Central Pension Fund on June 1 of this year, you had that same benefit on September 1 (plus any additional benefit you might have accrued for hours worked in the interim). Likewise, if you had retired with a CPF benefit of $1,000 a month on June 1 you would have had that same benefit on September 1--as well as for every month until your death, without any worry whatsoever about what happens to the stock market. This is another example of why defined-benefit plans provide real retirement security which cannot be matched by 401(k) plans. Originally
published in the International Operating Engineer |