Your Pension's Rocky Road

To save money, your city can postpone fixing the potholes on your road, while your employer can tinker with your retirement plan, perhaps creating potholes much deeper than the ones below your wheels. What's a Fool to do?

State and local governments are feeling the pinch from the shaky economy. Plummeting home values mean less is paid in property taxes, leading to budget crunches that threaten many of the services states and municipalities have long offered. (Ah, to be a city councilor during budget season.)

Plenty of businesses, of course, are facing similar challenges, and eyeing or implementing their own means of keeping the budget "lean." On the table for discussion internally are options such as hiring freezes and reductions in employee benefits. You've seen reductions in retirement benefits, too, by limiting health insurance options and decreasing or eliminating matching contributions and profit-sharing programs within employee retirement accounts.

Those entities that still offer traditional pensions are very possibly thinking about phasing them out, as so many others have already done. Many well-known companies have already reduced or frozen pensions -- examples include Hewlett-Packard (NYSE: HPQ), State Street (NYSE: STT), FedEx (NYSE: FDX), and General Motors (NYSE: GM). I suspect we'll see more names added to the list in the months ahead.

What this means to you is that you should brace for more challenges in your own financial life. If you receive or expect a traditional pension one day, prepare to get less than you expected. Prepare to pay more of your health-care costs.

Surprisingly ...
I was interested to read recently in a paper by the National Institute on Retirement Security that freezing a traditional, defined-benefit ("DB") pension and phasing in a defined contribution ("DC") plan such as a 401(k) can actually cost employers more than they save. For one thing, there will be a possibly long period where the employer is maintaining two plans concurrently, which is costly. The move can also hurt recruitment efforts and can quash the morale (and retention) of employees.

Still, not all companies will heed this warning. Already, most of us have 401(k)s instead of pensions. Fortunately, all is not lost. With some planning, we can make the most of 401(k)s. We can choose sensible investments within them. We can maximize Roth IRAs, too. (Hey, they offer tax-free earnings!) By not leaving our future comfort in our employers' hands, we can prepare for a brighter tomorrow.

(As for the pothole problem, wear your seat belt and swerve with care.)

Further 401(k) Foolishness:

• Are You Turning Down Free Money?
• Handle Your Old 401(k) The Smart Way