PENSION PLANS GOING FAST
Texas CPAs Say You Must Save Now to Fund Your Own Retirement

DALLAS — Some 34 million workers in the private sector are still covered by traditional pensions, according to the Pension Coalition, a business group. There are 31,000 such plans, paying $120 billion a year in benefits. However, the number of these defined-benefit plans are quickly disappearing from corporate America and are being replaced by 401(k) plans.

In fact, the vast majority of CPAs serving as corporate CEOs, CFOs, Controllers and in other executive positions believe American companies can’t continue providing pensions that adequately cover their employees’ retirement years, according to the results of a new survey by the American Institute of Certified Public Accountants (AICPA).

What can workers do as defined benefit plans are frozen and 401(k) becomes the mainstream for retirement? What should workers be doing to build their nest egg in this new corporate pension environment? Texas CPAs recommend six key strategies for designing a long-term investing plan, both inside and outside your 401(k), and keeping it on track, no matter what happens to the market or in Washington.

1. Don't count on a single retirement plan to do it all.

When did you last sit down and calculate how much money you'll really need for a comfortable retirement? Did you just figure that maxing out your 401(k) was enough? The truth is, for many investors contribution limits make it impossible to save enough in a 401(k).

You may not have realized that you were falling short because you never devised a savings goal in the first place. Or you took false comfort in simple math and a blip in history.

2. Diversify investments--it's still the key to success.

Next to your savings rate, your asset allocation is the most crucial element of your retirement strategy--and the rules of diversification do not change with the tax law. The overall amounts you hold in stocks and bonds have a bigger impact on your return than your investment choices do. Diversification also dampens your risk. Holding bonds as well as stocks can help the average 401(k) participant.

In general, 401(k) investors are a passive bunch, seldom adjusting their allocations or their investment choices. According to many of the mutual fund companies, many employees of pension plans don’t change assets and never trade. Investors have held on to stocks but too often by default. While it's great that investors haven't cut and run during the bear market, there are problems with inertia. For starters, you need to rebalance periodically to maintain your allocations. That way, you automatically buy low and sell high.

By failing to do so, you end up taking unnecessary losses when the market falls.

Inertia has also left many 401(k) investors undiversified within asset classes--most hold only three funds, typically a stock fund, an employer stock fund and a stable-value fund. Make sure your 401(k) is spread among large and small companies, as well as foreign equities, and keep a healthy percentage in fixed-income assets, especially as you near retirement and have little time to make up for stock losses. Stick to short-and intermediate-term bonds for maximum safety; those issues will hold up better than long-term bonds if rates rise. Also, consider your entire investment portfolio in your allocations, including investments outside of retirement plans.

Finally--as if you need another reminder--never forget that the riskiest asset of all is your employer's stock. Don't put more than 10 percent or so of your 401(k) money in it.

3. Make the most of a 401(k)'s free money.
The 401(k) company match is one unbeatable retirement savings perk that doesn't look to be going away soon--more than 80 percent of 401(k) plans offer a match, typically 50¢ on the dollar. No tax cut will give you a better deal than an instant 50 percent return. While a few troubled companies have dropped their matches, those appear to be isolated cases.

4. Diversify for tax purposes, too.
The very tax features that make 401(k)s so attractive also bolster the case for investing outside of them. Here's why: With 401(k)s, you put in pretax dollars and the earnings compound tax-free until withdrawal, when the money is taxed at ordinary income tax rates. The problem is, your tax rate may be higher in retirement than it is now--another president could raise taxes, not lower them--which would erase much of the advantage of the tax deferral. And if you fill your 401(k) with stocks, you'll miss out on the lower capital-gains rate when you sell.

5. Avoid needlessly locking up your money.
Up to this point, our advice has been to stick to your savings strategy--and step it up. But here's one exception: Think twice about putting money in a variable annuity. With this investment, you stash away after-tax dollars and your money grows tax deferred until it is withdrawn, when it's taxed as ordinary income. That trade-off may no longer be worthwhile.

6. Do additional research.
Read books and search online for more information about building an effective retirement savings strategy. Check out the Texas CPA profession’s free Web site for additional articles, tools and resources at www.ValueYourMoney.org.

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ABOUT TSCPA
TSCPA (http://www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 27,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.