Underfunded Pension Plans: A Threat To Your Clients?

But, the reality is that “often when an employee is expecting a pension, that is the nucleus of their retirement plan,” he adds.

Susan Wier, an executive vice president with First American Trust, Bloomington, Ind., and chair of the Financial Advisors Task Force of the National Association of Insurance and Financial Advisors, Falls Church, Va., says she advises clients not to have more than 10% of total invested assets in any one company, including an employer.

But sometimes, she continues, a client can have a much greater percentage in an employer because of stock options. In such cases, she recommends that a client sell some of that stock in stages at certain prices.

For clients with individual stock holdings, Wier says an advisor should consider the underfunded pension as one among a number of factors used in evaluating stock.

For the client who is considering retirement now as opposed to several years from now, Wier says the low interest rate used in plan assumptions is an important factor to consider.

Given the current low interest rate environment, it might be worth considering retiring now, she says. The reason is that if a lower interest rate assumption is used to calculate the money the employee should get from the plan, the current amount is higher, Wier adds. If rates climb in the next few years, the calculation produces a lower sum, she adds.

For a client who is relying on a pension plan of a financially weakened company, an adjustment in expectations needs to be made, says Amy Noel, a principal with Noel Financial Planning, Boulder, Colo.

Often, this means a combination of simplified lifestyle and more aggressive saving is necessary, she adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.