Pension tension: What to expect if your retirement plan is terminated
By Jenny C. McCune • Bankrate.com

It's bad enough working for a financially troubled company, but if you're a retiree or about to become one, you have an added concern: the fate of your retirement benefits.

Depending on how your company's been handling its finances and what type of retirement plan you have, you could end up with a lot less than you counted on.

Participants in 401(k) plans normally don't have much to worry about -- unless the company shells out stock instead of cash for its contribution.

Remember Enron? Its match to workers' 401(k)s was company stock; employees watched the value of their retirement accounts plummet with the stock's price in the wake of alleged misdeeds by the energy company's executives.

Making matters worse, the workers couldn't do anything to protect their pension positions: Enron froze their 401(k) plans, preventing them from selling the company stock that had accumulated. Such blackout periods, during which plan participants aren't allowed to make account changes, aren't illegal, but in the wake of several corporate scandals, a new federal rule was instituted to give employees more notice of upcoming account-hold actions.

Even if your employer goes under or the plan's third-party administrator files for bankruptcy, your 401(k) funds are still there. But, like the Enron workers, you could see your account's value drastically reduced.

Old-fashioned pensions can be a bigger problem
It's another story, however, if you have an old-fashioned company pension. Also known as a defined benefit plan, the company alone contributes to the account and you're paid a specific monthly benefit at retirement.

"In most situations, the plan does get terminated as part of the bankruptcy reorganization," says Tammy Shelton, principal at Mellon's Human Resources & Investor Solutions in Dallas, Texas.

This was the case when United Airlines announced that in order to survive bankruptcy it planned to end its four employee pension plans. Terminating them, according to the airline, would save the company $4.1 billion over five years.

There are two ways an employer can discontinue a pension plan: a standard or a distress termination.

In a standard termination, the plan has enough money to honor its obligations to retirees. So if you're vested in your company's pension, you'll receive your promised benefits from what you're owed at that point. The company, however, will not contribute any further to your pension. Employees who aren't fully vested in the pension plan get partial relief; their percentage of vesting is based on the number of years at the company.

Under a distress termination, the employer must show it is under severe financial distress and that continuing to fund the pension plan would deal a fatal blow to the business. In this case, administration of the plan is taken over by the federal Pension Benefits Guaranty Corporation.

Beyond distress or standard terminations initiated by the employer, plans also can be shut down by the PBGC if the agency determines that is the only way to protect plan participants.

Such terminations are rare, but they do happen. For example, if a corporate pension plan can't meet its current obligations and is unable to pay the monthly sums owed each retiree, then the PBGC could step in.

Federal pension guarantees
In essence, the PBGC insures pensions much the way the Federal Deposit Insurance Corporation insures your bank account. Currently the PBGC says it pays retirement benefits to 459,000 retirees in the 3,287 pension plans it administers.

A company pays PBGC yearly insurance premiums, set by Congress -- currently $19 per worker. The PBGC invests the premiums in stocks and bonds, much as you would for your own 401(k), or as a company would invest for its corporate pension plan. But your plan is insured by PBGC even if your employer fails to pay the premiums.