5 Steps to Take When Your Company's Pension Is Underfunded

08/09/2011 Share 0 comments

As economy slows and the stock markets are becoming more and more hostile, many workers are getting more unpleasant news from their retirement pension programs. A recent Bloomberg article Company Pension Underfunding Jumps 38% to $351 Billion as Economy Slows reported The gap between the assets of the 100 largest company pensions and their projected liabilities has widened. Here are some details:

• The underfunding increased $97 billion in August to $351 billion, actuarial and consulting firm Milliman Inc. said today in a statement. That compares with the record $446 billion deficit in August 2010.
• Assets declined $64 billion and liabilities increased $33 billion between Aug. 1 and Aug. 8.

Americans witnessed the unpleasant event of U.S. debt rating being downgraded from AAA to AA+ by S&P last Friday. If the U.S. government, once seen as the safetest in the world, can be downgraded overnight, it is not that much inconceivable for private companies' credits deteriorate. We have heard about GM's vast underfunded pensions and the debacle of Lehman Brothers' mini bond (structured products with Lehman being the borrower/guarantor). Many state governments (Wisconsin, for example) have started to propose a hyrid pension retirement program that has a similar self managed 401K feature for future retirement benefits. Same for many companies.

It is becoming more important than ever to take care of your own retirement investments. Here are  steps you can take:

1. Consider Rollover: Consolidate your retirement accounts by studying those plans investment options and fees. You can use MyPlanIQ's RolloverIQ tool to first compare those plans' ratings. You then can rollover accounts in those underperforming (401K) plans to other better plans. If you have accounts in your previous employers' 401K plans, you can also consider roll them over to brokerage IRA accounts. We list some brokerage ETF/mutual fund plans on Brokerage ETF/Mutual Fund Portfolios page.
2. Decide Risk Profile: we quote this from our latest newsletter: "Many times, when markets are good, people tend to increase their risk or are under impression that they can take more risk. When markets tank, they start to panic and swear that they can not take the same risk they thought they could withstand in good days. Regardless of what investment methods or strategies you are using, setting up a proper risk tolerance level is the single most important step for success or failure."
3. Asset Allocation: after deciding your risk profile, choose the right asset allocation strategies such as Strategic Asset Allocation that invests in a diversified array of funds with periodical re-balancing and fund rotation (if there is any), or Tactical Asset Allocation that stays nimble to avoid big loss when times are bad. Given the current economic situations, there will be plenty of times that are challenging.
4. Be Disciplined: stay the course and do not slack off your regular (monthly or quarterly) re-balance. It might just take 10-20 minutes a month to do re-balancing but that might be one of those minutes best spent in your life, at least in your financial life. 
5. Pat Yourself on the Back on taking control of your own future in your own hands! It is better than arguing with your boss on a raise or feeling hopeless when your pension benefits are reduced.

You can always start with a simple plan to understand how the asset allocation strategies work. For example, monitor the Simple Is Better (SIB) Six Core Asset ETFs plan that uses only six representative ETFs: VTI for US Stocks, VEU for Developed Country Stocks, VWO for emerging market stocks, VNQ for REITs, DBC for commodities and BND for total bond market index. Browse the historical transactions on those portfolio pages. Even better, monitor them for a period of time, especially during this hard and difficult period.

Unlike many other services, we are open (sign up our newsletters that give timely update and explanation on what/how we do), we are free (registered users can follow up to five Strategic Asset Allocation portfolios for free) or low cost.

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