The first corporate pension dates back to 1875, when the American Express Company began providing workers half of their annual salary in retirement once they hit 20 years with the company. Shortly thereafter, utilities, banking, railroads and other manufacturing companies also began providing pensions.
However, problems quickly developed after companies went out of business, leaving workers without retirement benefits. This brought about one of the most significant pieces of retirement legislation with the Employee Retirement Income Security Act (ERISA) of 1974. It made pension plans more secure by establishing regulations for employer-sponsored retirement plans.
Once seen as an anchor in the three-legged stool of retirement, pensions have slowly been phased out over the last few decades as companies and government agencies look to cut costs and shift more of the retirement-saving responsibility to the employee.
Here are three questions to consider with your pension as you approach retirement.
Should You Take the Monthly Check or Lump Sum Payment?
There are two distribution options available to retirees: You can take a lump sum distribution or monthly payments over your lifetime. The biggest question you need to ask yourself is: Will your employer be able to meet its long-term commitments?
A lump sum gives you a large amount of cash now, but the total amount you receive could be lower than what you would be paid out if you were to stay in the plan. A monthly check gives retirees guaranteed monthly income for the rest of their life. However, you may only receive a portion of those payments should your company go bankrupt.
Other things to consider include spousal benefits and taxes. Some pensions offer spousal benefits, but if you take the monthly payment route and die soon after, those benefits potentially end there, depending on the option you choose. Additionally, if you take the lump sum and don’t roll over that money into an IRA, you will pay taxes on the distribution.
How Has the Coronavirus Impacted Pensions?
Even before the coronavirus, government-backed pension funds were facing a shortfall: They don’t have enough money to pay out the benefits promised to retirees. Much of the funding for pensions comes from the stock market, and with Wall Street recovered from its pandemic lows, pension funds have largely stabilized. Some private companies hit hard by COVID-19 last year, most notably airlines, offered buyouts and early retirement packages to employees in an effort to cut costs. Some experts anticipate that trend may continue with other pension-providing companies if they begin to struggle financially as well.
New trends in the way pensions are being overseen are also creating additional concerns. More private companies are seeing …….