American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Feb. 2006 – Pensions Woes

The demise of the traditional pension plan has accelerated rapidly in recent months. The enclosed article explores the root causes of this phenomenon. Workers who are not prepared to assume more responsibility for their retirement planning may end up working far longer than they had hoped.

Defined benefit plans, as their name suggests, pay a prescribed benefit to retired employees that is often based on an employee’s length of service and average salary. These plans were designed to keep employees tied to their employers. Defined contribution plans, such as 401(k) plans, on the other hand, make no promises, and employees, rather than employers, assume the risk that their savings might not meet their savings goals for retirement.

Higher funding costs and changing demographics have forced employers to abandon or freeze their existing pension plans. Meanwhile, proposed accounting changes and pending legislation intended to improve transparency and shore up weak plans will, at the same time, provide incentives for firms to abandon these plans and make it easier for them to do so.

Employees of firms facing bankruptcy cannot count on the Pension Benefit Guarantee Corporation (PBGC), ostensibly the nation’s pension safety net, to provide much help. In these PBGC “bail outs” often only a fraction of expected pensions are paid out. The PBGC is underfunded and fundamentally flawed; it charges a flat-rate premium of $19 per participant (employee) per year, so premiums do not necessarily reflect the risk contributed by each employer in the risk pool.

What all this means is that workers will increasingly take responsibility for their own retirement planning. Fortunately, a variety of well-designed defined-contribution plans are available. Unfortunately, many workers fail to take advantage of them. It is estimated that enrollment in such plans among low-wage workers is somewhere between only 10 to 25 percent.

We can help employers and employees who are confronted with this changing retirement scene. AIS offers consulting services for sponsors of 401(k) and other defined-contribution plans. Our program is unique. We are owned by an educational institution, so at the heart of our program is an education program designed to maximize employee participation. We make investing easy by providing “lifestyle” portfolios comprised of asset classes derived from our empirical research. We utilize our highly-disciplined passive approach, and the total cost of our plan is among the lowest available. Contact us for more information at (413) 528-1216 or

Also in This Issue:

The Decline of the Defined Benefit Plan
AIS Confusion
Investment Fallacies
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles