Pension Plan Changes Coming Your Way

President Bush is expected soon to sign into law a bill that overhauls the country's pension plan laws.

How will this affect you? Let's take a look. First of all, a defined benefit pension plan is one that guarantees a specific benefit for life. For example, you work for 30 years for a company and at age 50 you can retire and receive 75% of your pay. If you are in any type of pension plan that uses a similar type of formula to determine a monthly benefit, then you are in a defined benefit plan. Social Security is a defined benefit plan in that they send you a statement every year telling you what your monthly benefit will be when you retire.

The problem with defined benefit plans is that they are hard to fund. During booming bull markets, the plans are flush with cash, but during bear markets they become under funded. They are great for current retirees. They are receiving a monthly check that is indexed to the annual cost of living index or COLA.

The dark side is simply as more people reach retirement age and that number is growing by the millions every year, these plans cannot handle the increase in numbers, especially in light of the fact that the stock markets have barely made it back to their levels of 2000. That means for most of these pension plans, they have not made any money for over six years. Their plans have not yet recovered to their pre-2000 funding levels.

What this means is that companies and organizations that offer these types of plans need a way out. Enter the new pension bill that allows companies to convert their plans to a cash balance plan. This means the money you pay in is the money you get when you retire. That is a far stretch from the old plans.

This bill was tested in a court case involving IBM. The claimants believed that changing the plan discriminated against older workers. A U.S. appeals court overturned a lower court ruling and ruled in IBM's favor. This paves the way for the conversion to cash balance plans across the country.

Since 1985 the number of defined benefit plans insured by the U.S. Pension Benefit Guaranty Corporation (PBGC) has declined from 114,500 to less than 32,000. You can expect to see that number much lower in the coming years.

Diversify you retirement income. It is the only way to protect yourself from financial catastrophe.