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The Ups and Downs of Pension Plans

Darrach Bourke

Based in San Mateo, California, Darrach Bourke serves as senior vice president of Emerson Equity, a brokerage firm. Among the services Darrach Bourke provides is retirement planning, with an emphasis on creating pensions such as the 401(k).

With a relatively small number of companies offering pension plans these days, most businesses provide contributions to 401(k) plans, which are similar to pensions. Set contributions each year lead to predefined income streams that may be accessed after the employee reaches a specified age.
With a pension, the underwriting company takes on the risk and is obligated to pay a set income stream no matter how the investment account performs over the years. In addition, the income stream must be paid out as long as the beneficiary is alive.
The downside of this is that there are defined limits to payments. When the investment performs beyond expectations, the pension recipient does not participate in this.
A recent trend is hybrid programs that involve the provider assuring the contributor a defined future income stream while offering an upside should the investments outperform the markets. These pensions do have higher associated costs than traditional plans, but many people are happy to accept higher fees since the cost may pay off in the future.

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