Underfunded pension plans — those with more liabilities than assets — are becoming a source of concern for many business owners and participants alike.
Financial experts have begun sounding the alarm about this problem, with some going so far as to predict a looming crisis — particularly in the public sector. These challenges also pose a potential risk to individual company pension plans. However, implementing responsible plan management strategies can go a long way toward helping prevent a shortfall.
A professional wealth management firm can provide invaluable financial planning assistance for both company owners and individual participants, to develop and implement strategies designed to minimize shortfalls and mitigate as much risk as possible.
How Does Pension Plan Underfunding Happen?
Companies fund pension plans in two primary ways: with employer contributions (in cash and company stock) and returns on invested contributions.
A variety of influences can lead to underfunding, most related to financial market trends like low interest rates. However, if employer stock contributions — as opposed to cash contributions — become excessive, the plan may become overly dependent on the company’s future growth.
If a company’s plan continues to be underfunded for a period of years, the IRS requires the employer to increase its contribution. This can place undue financial stress on the company, potentially pushing the firm into unstable territory.
Sometimes this phenomenon occurs simply due to assumptions of growth rate that don’t come to pass, often due to sluggish markets or unexpected market corrections.
How Does an Underfunded Pension Plan Affect You?
If you’re a business owner, an underfunded plan means you may not be able to make good on the distribution you’ve promised your participants. It also means you may have to pony up additional contributions per IRS rules.
If you’re a participant, this means you may not be able to rely on anticipated pension funds for retirement, potentially putting your financial planning and wealth management strategies in jeopardy.
In both cases, this is a scenario you want to avoid at all costs.
Addressing Potential Pension Plan Shortfalls
Addressing the growing problem of pension underfunding is a complex proposition. Professional wealth management firms assist institutions with pension plan development and management, and having a financial planner to manage your firm’s investments can help keep them on track.
For participants who are relying on having access to their pension funds when the time arrives, financial planning is perhaps even more important, to help address potential market uncertainties.
The Certified Financial Planners™ of Divergent Wealth Advisors help both individual and institutional clients plan for their financial futures. Our institutional investment management services help to protect and maximize your benefit plan. Our participant services and individual wealth management services are designed to provide peace of mind and impart the knowledge and skills you need to effectively plan for the future.
Contact Divergent Wealth Advisors today to learn more about our fee-based financial planning and management services, and to discuss specific concerns about your pension plan.
DISCLAIMER: It is important to note that this information is not meant to provide investment, tax, legal or accounting advice. This material is for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should always consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.
Approved by Rick Collins, Divergent Wealth Advisors LLC, Chief Compliance Officer 8/10/2018