Underfunded Pension Plans: A Threat To Your Clients?
The question of whether consumers are adequately funding their retirement is now also being asked of their employers, and the answer is prompting some financial advisors to offer ways for clients to protect their financial future.
Estimates suggest pension plans are underfunded by roughly $300 billion, according to Jeffrey Speicher, a spokesman for the Pension Benefit Guaranty Corp., Washington.
If a plan insured by PBGC is unable to meet its obligations, then participants age 65 and over would receive up to $43,970 per year, with the amount grading down on an actuarial basis for younger plan participants, he says.
The mere fact that the defined benefit plans of some companies are underfunded is not necessarily reason to sound off alarm bells, although it may be cause for more scrutiny, according to interviews.
The funding in a plan is “utterly predictable and cyclical” and tracks the stock market, says John McFadden, a professor of taxation with the American College, Bryn Mawr, Pa. “It is like the seven lean years and the seven fat years.”
If a client is in an underfunded defined benefit plan, then in theory an advisor can focus on building other parts of a clients investment portfolio to diversify any risk associated with the underfunded plan, says Brian Orol, principal with Strategic Financial Planning Group, LLC, Raleigh, N.C.