How healthy is your
company's pension plan
Are you relying on a traditional pension plan to see
you through your retirement? If so, you'd be wise to keep an eye
on your company's financial health.
Traditional pensions, or defined-benefit plans, promise
retirees a certain amount of money when they retire. The benefit
usually is based on categories such as years of service and salary.
More typical today are defined-contribution plans
such as 401(k)s where the amount an employee receives at retirement
is based on employee and employer contributions and the returns
earned by the investments. Nevertheless, millions of American workers,
especially those employed by many of America's bigger corporations,
are counting on old-fashioned, employer-paid pensions.
Yet it seems that every day another company is in
the news because its pension is seriously under-funded. General
Motors, Ford, IBM and Boeing are among the hundreds of companies
faced with finding cash to pump into under-funded pension plans.
Usually, a pension plan is considered under-funded
if its assets are less than 90 percent of its current liabilities.
Under-funded doesn't necessarily mean that a pension
plan is in trouble. Most companies have enough assets to pay retirees'
current benefits. But lousy stock market returns and low interest
rates on fixed income have crippled the returns on pension investments.
A report by Merrill Lynch says that most of the 348
S&P 500 companies with defined-benefit plans have liabilities
exceeding assets. As a group, the pension funds alone, excluding
other benefits such as health care, are short by an estimated $184
billion to $324 billion.
Is your pension threatened?
If your company is financially healthy, it should be able to make
up the shortfall once stocks and other investments start yielding
healthy returns. But if your company is struggling, your full pension
could be threatened.
"Corporate problems happen all year long. If
it's not Ford it's someone else out there," says Gloria Della,
spokeswoman for the U.S. Department of Labor. "The fact that
there is a financial problem at a corporation doesn't always equate
into a problem with the defined-benefit plan. You can't necessarily
say, 'There goes the pension!'
"But consumers have to be a lot more educated
than in the past. People didn't think about retirement plans. They
knew someone was making a contribution for them and that's all that
mattered. It's incumbent upon them now to monitor their plan."
Most defined-benefit plans are insured by the Pension
Benefit Guaranty Corporation, a government corporation charged with
making sure employees who work for a company that goes bankrupt
or can no longer support the pension plan get at least the minimum
Cold comfort for long-time employees counting on much
heftier checks, says Michael Kresh, a certified financial planner
in Hauppauge, N.Y.
"The guarantee of the pension is only as good
as the guarantee of your firm and the PBGC. If the firm is in jeopardy,
compare your monthly benefit with what the PBGC plan currently guarantees
and if there's a big enough gap, and in a lot of cases there would
be, people who retire may end up with a lower pension than they
thought and they have to fill that gap."
The maximum benefit this year that PBGC would pay
someone who is 65 years old at retirement is $43,977. But if someone
retires at 60, the annual maximum benefit drops to $28,500. Conversely,
if a person retires at 70, the annual guarantee rises to $73,000.
But with so many companies drowning and their pensions
being taken over by PBGC, the rescuer is now in need of a life preserver.
"The PBGC surplus is gone," says spokesman
Jeffrey Speicher. "We have $25 billion in assets and $29 billion
in liabilities, so we have a shortfall.
"We had a very big year in 2002. We terminated
or began the process of taking over three of the largest plans in
our history -- LTV Steel, National Steel and Bethlehem Steel. We
also took over Polaroid's plan, which was under-funded by about
"We have enough assets to pay benefits for a
number of years, although I can't say how many more years we can
continue paying benefits. It's not a crisis now, but there are long-term
financial problems that need to be addressed," Speicher says.
Individuals have virtually no say in the structure
of a defined-benefit plan, which is why it's always smart to have
a separate savings plan and participate in a 401(k) if it's available.
But there are things employees can do to make sure they're not the
last to know their full pension is in jeopardy.
How to stay informed
Employees must receive a copy of the summary of their pension plan
when they become participants. It's called the summary plan description
(SPD.) It tells when you begin to participate in the plan, when
your benefits become vested, how service and benefits are calculated,
when you will begin to receive payments and how to file for benefits.
The plan administrator is required to make the SPD
available to plan participants within 90 days of the time they're
covered under the plan or at any time upon request.
Companies that have 100 or more employees covered
by a defined-benefit pension must file Form 5500, which is a detailed
financial statement that, among other things, shows how the plan's
investments have performed. Smaller companies can file the less-detailed
version Form 5500-C/R.
The summary annual report (SAR) is a summary of the
5500. Your company must make it available to you each year. If your
company files 5500 C/R, you should get the SAR about every three
Each year, you should also request, in writing, your
individual benefit statement. It tells what benefits you have accrued
Some companies make employees ask for these pieces
of information. Others, especially the biggest companies, are very
good at keeping employees informed.
In addition, carefully read any additional pension
notices you may receive, either by mail or at work.
For instance, all pensions covered by PBGC insurance
pay premiums. Under-funded pensions pay an additional premium if
they are less than 90 percent funded for two out of three years.
If a company is paying the under-funded pension premium, it has
to notify the participants.
Don't be shy about questioning the plan administrator,
especially if recent developments at work have you concerned.
"If employees hear or see indications of cutbacks
at the company, ask the plan administrator what that means for the
benefit program. Participants have the right to go to the administrator
and ask about the plan. If they don't get an answer, then they should
contact us," says Della.
If you have a financial adviser, make sure he or she
reviews your pension plan and gives you guidance.
"All of our clients go to their Human Resources
department to constantly get updates on their plans, particularly
as they near retirement," says Kresh.
"If your plan is unique and allows a lump sum
withdrawal, and you have a feeling the firm is in jeopardy, taking
advantage of that option is very important, rather than retire and
then the company goes into bankruptcy."
Even if bankruptcy isn't an issue, perhaps your company
is merging or being acquired and you're not sure what would happen
to your pension. Independent professional advice may be warranted.
Kresh recently advised a 59-year-old client whose
company is being acquired to take his pension in a lump sum and
"There has been no specific guarantee that what
I have now would follow me to the new company," says the client,
who prefers to remain unidentified.
"A job with the new company isn't guaranteed.
I'd have to re-interview with the new company. If I leave now I
have the option of a lump sum. I'm not in the position to let anything
out of my grubby fingers. It's my money; I earned it.
"Federal law says your pension is guaranteed,
but it's not the whole thing. What they pay is just a fraction of
The Department of Labor has a wealth of pension information
on its Web site. Its publication, "
What You Should Know About Your Pension Rights," has information
on defined benefit and defined contribution plans.
If you want to speak directly with someone at the
Employee Benefits Security Administration division of the DOL about
your pension, call (866) 444-3272.
Or, check for a
DOL field office in your area.
Those offices will also be able to help you get written
copies of your pension's summary plan description, summary annual
report or a copy of Form 5500 if you're unable to get them from
your plan administrator.
-- Posted: May 20, 2004