Retire Rich

August 20, 2007

Decline in Pensions Good News for Funds

The Department of Labor estimates that automatic enrollment in 401(k) plans, as protected under the Pension Protection Act, will add between $45 billion to $90 billion a year to the plans, which had $3.6 trillion in assets under management in 2006, according to the Investment Company Institute.

But there's another factor at play that will give a tremendous boon to 401(k) administrators and providers, and that is the demise of the $2.2 trillion private pension industry.

Two-thirds of employers that offer pensions plan to freeze them to new hires or eliminate them altogether over the next two years, according to a survey by the Employee Benefit Research Institute and Mercer Human Resources Consulting. In the past two years, the survey also found, 25% of employers closed pensions to new hires and another 13% had frozen them for all employees, for a total of 38% making some alteration.

This creates a tremendous sales opportunity for mutual fund companies, which in recent years have tried to expand 401(k) sales by pursuing smaller companies.

During the booming stock market days of the 1990s, pension plans in the United States only had to collectively contribute $30 billion a year to keep them adequately funded, but after the crash of the stock market in 2000 and a subsequent steep decline in interest rates, that tripled to $90 billion a year and left a number of pension plans underfunded.

Now, the Pension Protection Act has prompted 30% to freeze or close their plans, the survey found.

"This is a watershed event," Jack VanDerhei, a pension specialist at Temple University told the Los Angeles Times. "There has been a steady decline in traditional pensions for two decades, but the trend is really accelerating, and it's going to accelerate even more."

"Companies hate uncertainty, and this law [the Pension Protection Act] has created a lot of uncertainty," said Mauricio Soto, a research economist with Boston College's Center for Retirement Research. But David Certner, legislative policy director for AARP, bemoaned the demise of pensions, saying that 401(k) plans "are not measuring up" and put too much responsibility on investors.

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