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Understanding the Faults in Pension Plans

What are the faults in pension plans?

The Guarantor

First of all, there must be a guarantor. A plan is only as good as theguarantor. Often the government is the guarantor, although sometimes private pland have other guarantors. When choosing a pension plan, a person should always guarantee the strength of the guarantor. When a person depends on their pension plan for retirement they are placing enormous trust into the company, fund or guarantor (sometimes the government).

The Statutory Protection

Some types of pension plans are protected from creditors or medicaid by statute. Other plans may be up to a court to decide. A person when choosing the type of pension plan they are setting up should consider what types of exemptions and protections are in place for the safety of the assets placed into the plan. Plans may offer limited protection or have a cap on the amount protected.

The Rate of Return (ROI)

Pension plans are funded in different ways. In some plans you can lose your principle and others the principle is protected. There are pension plans with guaranteed ROI and others that are more risky and left up to the market fluctuation, both good and bad. In some cases it is possible to lose your principle or go below a certain level for ROI. A person should be aware of the risk of their plan as often indicated by the offered ROI.

Growth Rate

Some pension plans offer very slow growth rates, while there are other options.

Prohibited Transactions

The IRS and certain statues may prohibit the transfer of the plan into anothe plan. Be aware of these statutes early in the game for protection before it is too late.

Lack of Flexibility

There are plans that are unprotected and frozen barring reaching a certain age or circumstance of hardship. Be knowledgable of the restrictions in your plan.

Termination

Some plans transfer to the surviving spouse and others terminate when the grantor dies. Other plans give you an option of choosing either of these. Some pension plans offer lump sums.

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