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What to do if Your Pension is Frozen or Terminated

Written by Ed Snyder, CFP° on .

terminator - for blog

Steel monster- Terminator. Photo by Rostislav Kralik

In 2017, only 16% of the Fortune 500 companies offered a traditional pension plan to employees, compared to 59% in 1998*. While the use of pension plans is on the decline, among pharmaceutical companies those numbers are much better, with 50% of companies still offering pension plans.

The shift away from pension plans is obvious and ongoing. As more and more companies get rid of their pensions, it makes it easier for other companies to also dump theirs. It used to be that a company needed to offer a pension to employees to be competitive with other employers. That's not true anymore.

Companies eliminate pension benefits to employees in two ways: freezing or terminating. Let's take a look:

Freezing: When a pension plan is frozen it is closed to new employees and current employees may stop accruing benefits, but the plan continues to operate. You generally have to wait until retirement age to begin receiving benefits – either a lump sum or a monthly annuity amount.

Termination: When a pension plan terminates, it stops operating. Employees participating in a pension when it is terminated are generally offered a monthly annuity payment during retirement or a lump sum payment to be made at the time of the termination of the plan. In either case, participants will still receive a benefit and will not lose anything they've already earned to that point. They just won't earn more benefits in the future.

So, what should you do if your employer freezes or terminates its pension plan?

How Investing is Like the Indy 500

Written by Ed Snyder, CFP° on .

indy 500 -blog- robert rescot

Photo credit: Robert Rescot

The Greatest Spectacle in Racing, the Indianapolis 500, returns to the Indianapolis Motor Speedway (IMS) this weekend for its 102nd running. I'm a big fan of the race, the history of the race and the track itself. Just as I'm a student of the history of the track, I'm also a student of investing. The 500 and investing have a lot in common.

Many successful long-term investors don't get too excited when things are going well, and they don't get down when things are going poorly. Instead, they stick to long-term plans that are built around their financial goals. The best way to reach those long-term goals is to remain disciplined and patient – whether you are experiencing joy over the markets good returns or grief from periods when things aren't so great.

Study after study has shown the importance of staying disciplined. Case in point: A recent report by research firm Dalbar, Inc. The study found that between December 31, 1997, and December 31, 2017, the stocks in the S&P 500 index returned an average of 7.20% annually.* Yet the average stock investor only gained 5.29% on average over the same period. One major reason for this sort of performance gap is that most investors just don't stick to a plan. Instead of remaining disciplined and patient, they let their emotions rule and try to "time" the market - jumping in and out as stocks rise and fall. The result is usually very predictable.

The Parallels Between the Indianapolis 500 and Investing

Last year Takuma Sato won the 500 with an average speed of 155.395 mph. Sato also had the fastest race lap at 226.190 mph. When you look at just the 155.395 mph as Takuma Sato's average speed, it doesn't give you any indication that these cars are turning laps at 220 mph plus. So, if the cars can go 220 mph, why can they not average more than 155.395 mph during a 500-mile race?

Many laps of the race have high average speeds but then a yellow flag can come out because of an accident and the cars slow down behind the pace car. Consider that the average speed for caution laps is 75-80 mph, significantly slower than racing speeds. There were 11 cautions during the race for a total of 50 laps. Many times, during a caution, drivers will go into the pits to change tires and refuel. The speed limit on pit lane is 60 mph so pit stops also greatly reduce their average speed.

Investments perform in similar fashion. Looking at the chart below you'll see that the return of the U.S. stock market from 1926 through 2017 has averaged 10.27% per year. This is like Takuma Sato's average race speed of 155.395 mph. Over those 92 years, the market had an annual return within two percentage points of the average of 10.27% in only 6 years. That's like saying that Sato turned lap speeds near 155 mph only 13 out of 200 laps. Some years the market did really well, like 2009 when it was up 26.26%. And some laps Indy cars go really fast, like Sato's fastest lap of 226.190. Other times the market is way down, like in 2008 when it was down 37%. Similarly, race speeds are way down on yellow laps and especially when the cars are on pit lane, with its 60 mph speed limit. Did you know that the stock market has had a 10% or more decline about once per year, on average, since 1948? So, just like yellow flags or pits stops, market pullbacks are common occurrences.

 chart

Focus on the Finish Line

The point is, whether it's the Indy 500 or investments, in achieving your average speed or average return, you will likely not experience speeds lap by lap near the average speed for the race. Just as you will likely not experience returns on your investments year by year near the average returns that you will experience over the long term. Some laps (years) will have much greater speeds (returns) while others will have much slower speeds (lower returns). Drivers in the Indianapolis 500 need patience and discipline to make it through the long 200 laps and 500 miles. They realize the race isn't won on the first lap. They also realize that an ill-timed pit stop or yellow flag, during which they are only going 60 to 80 mph, does not destroy their progress in moving towards their ultimate goal of the finish line. They remain focused and do not get rattled. Investors also need patience and discipline to make it to their long-term goals. You must realize that investing is not a race, it is a long-term journey and it certainly is not won or lost on the first lap or in any one year. Pit stops and caution flags happen in racing. We expect them. They are just part of the sport and although we expect them and we know they will happen, we don't know when. Yet, even with these slow-downs, drivers and cars go on to achieve tremendous average speeds. These slow-downs also occur during your investing lives on your way to your goals. Just like in racing, we expect them to occur. We know it's going to happen, but we don't know when. It doesn't mean that we give up. It's part of investing. Remain disciplined and patient and focus on your long-term goals. You've got to stay in the race, even during the yellow flags and pit stops, to be in it at the finish line.

Footnotes: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results

*https://www.americanfunds.com/advisor/pdf/shareholder/ingefl-050_dalbar.pdf

Here's the Good News About the Stock Market Being Down

Written by Ed Snyder, CFP® on .

on sale website

The stock market was down about 2% yesterday and, believe it or not there was a headline – "The Stock Market is Having its Worst Second Quarter Since the Great Depression". The quarter literally started yesterday. This is the type of negative and doom and gloom type stuff you're going to see. It's no wonder that people get nervous about things.

 

stockmarket small

Put these market slumps in perspective. It's normal and it's expected. It's the price that we pay, as investors in the stock market, for returns that have historically been better than returns that we can get anywhere else. It's just the price of admission if you will. It shouldn't be a surprise that the market goes down. I saw a great Tweet today by Morgan Housel - "About once a year people forget that the market falls 10% about once a year." So true.  

In fact, look at it another way – today is April 3rd. Depending on when you get paid, whether you get paid twice a month, once a month – if you get paid the 15th and 31st or 15th and 1st, your 401(k) contribution probably went in within the last couple days. You're buying shares in your 401(k) that are about 10% cheaper than they were back at the end of January.

So what does that mean in dollars and cents? If you bought a share for $10 a share back then, today it's on sale for $9 a share. That means if you put in $100 back at the end of January, you would have received 10 shares of that investment for $10 a share. Today when that money goes in you're receiving 11 and some fractional shares. So you're receiving at least one extra share for the same amount of money.

It's on sale. Normally, we enjoy sales. For some reason, in the stock market, we get upset about it.

Don't get deterred by the headlines. As we know, these downturns are temporary and they're necessary. We just need to exercise patience and discipline and keep our eye on the long term.

Eli Lilly Employees: Got A Roth 401(k)? You Should Know This

on .

need-to-know-blog

Roth 401(k) withdrawals

Qualified distributions from a Roth 401(k) may be taken tax free. A withdrawal is considered qualified when it is made after the account holder has attained age 59½ and a minimum of five years have elapsed since January 1 of the year of the first contribution to the Roth 401(k) account. Here's the catch. After you retire or otherwise leave your employer, if you rollover your Roth 401(k) to a Roth IRA the time during which the assets were in the Roth 401(k) does not count toward the Roth IRA’s five year holding period.

Why you need a Roth IRA

The five-year holding period is never carried over to an individual Roth IRA upon rollover from a Roth 401(k). The Roth 401(k) funds will be governed by the five-year rule applicable to the Roth IRA. If the Roth IRA has already satisfied the five-year period, then the funds that were rolled over from the Roth 401(k) are deemed to have also met the five-year period, even if they were in the Roth 401(k) for only a year. This is why, if you choose to participate in the Roth 401(k), you should also consider establishing a Roth IRA as soon as possible either through contributions or a conversion if ineligible to contribute due to the income limits.

Qualified distributions from a Roth 401(k) may be taken tax

free. A withdrawal is considered qualified when it is made

after the account holder has attained age 59½ and a

minimum of five years have elapsed since January 1 of the

year of the first contribution to the Roth 401(k) account.

Here's the catch. After you retire or otherwise leave your

employer, if you rollover your Roth 401(k) to a Roth IRA

the time during which the assets were in the Roth 401(k)

does not count toward the Roth IRA’s five year holding

period.

The five-year holding period is never carried over to an

individual Roth IRA upon rollover from a Roth 401(k). The

Roth 401(k) funds will be governed by the five-year rule

applicable to the Roth IRA. If the Roth IRA has already

satisfied the five-year period, then the funds that were rolled

over from the Roth 401(k) are deemed to have also met the

five-year period, even if they were in the Roth 401(k) for

only a year. This is why, if you choose to participate in the

Roth 401(k), you should also consider establishing a Roth

IRA as soon as possible either through contributions or a

conversion if ineligible to contribute due to the income

limits.

Remarks About Stock Market Pullback

on .

tree sunset medium 

We may have forgotten what a bumpy ride the stock market can be. The last few days have been a good reminder, with some rather large declines. We'd like to provide some perspective on this.

First, don't let the big numbers get to you. As the market has risen over the last several years, these point numbers mean less and less. It's about the percentages, not the points. Recently the Dow was down 1175 points in a day, which one news outlet labeled as the "worst point decline in history". While this may be true, in percentage terms (4.6%), it is certainly not the worst decline ever.

Five years ago, the Dow was at about 14,000. A drop of 1175 points would have been an 8% decline, almost twice as much as it is today, percentage-wise.

Second, market declines are very normal.

  • A 10% decline happens on average, once a year and last occurred in August 2015*
  • Although the market is down 10% from its January 26th high, it's still up 19% over the last 12 months.**
  • It may also be reassuring to know that the market has always recovered from declines. Although past results don't guarantee future results, remembering that downturns have been temporary may help calm your fears.