Fortune 1000 companies continue to freeze their pensions at a steady pace in this uncertain economy, according to a recent Towers Watson study. By freezing pensions, companies are effectively putting their defined benefit plans on ice by either closing off benefits only to new hires (known as a soft freeze), or halting all future benefits for existing employees (called a hard freeze).
If companies are in serious financial trouble, they may terminate their plans. In extreme cases, like when a business goes bankrupt and the plan is in default, the Pension Benefit Guaranty Corporation steps in to make the plan participants whole -- to an extent.
Plan freezes have become more commonplace in recent years. In 2004, only 45 Fortune 1000 companies had one or more frozen defined benefit plans in place, but now, 208 companies have at least one frozen plan. Fortune 1000 companies are America's largest companies based on revenues, so these companies are in a good position to offer great benefits to their employees. In fact, more than half of these behemoths still do offer a defined benefit plan, and 378 offer only plans that are not frozen. But, in general, the vast majority of companies don't offer DB plans.
Defined benefit plans base pension amounts on a formula that takes into consideration an employee's salary and tenure. The longer the tenure and the higher the salary, the better the benefit. These plans became a popular way for companies to foster loyalty among workers. The motive had nothing to do with a sense of moral duty; it was a way to avoid high turnover.
Times have changed. It's no longer financially viable for most companies to offer these expensive plans. They're not required by law to offer or maintain one.
And workers are not inclined to stick with one employer for 10, 20 or 30 years just for the reward of a pension check. It's a heavy price to pay, particularly if job satisfaction is low. Portable pensions in the form of 401(k) and 403(b) plans make more sense for a mobile work force. The trade-off: Workers are wholly responsible for their retirement planning.
If your pension freezes over
If you're a prospective employee in the interviewing process with a company that has a frozen plan, too bad. You can't attempt to get in the plan as a negotiating tool in the hiring process, says Nevin Adams, editor-in-chief of Plansponsor.com. "There's no one-off negotiating, no matter how 'special' you are," he says.
If you are an employee with a vested interest in a plan that's going on ice, you'll get a statement at least once a year letting you know its value. Companies that are intent on getting out of the pension business won't add any money to it no matter how big your raises get or how many more years you devote to the firm. But you won't lose what you've already earned.
Some companies convert their plan to a cash-balance or an account-based plan to which they may apply an annual credit (5 percent is common, says Adams). That's free money (and subject to change), but the employer is paying out much less than it otherwise would in a DB plan. In addition, the funds are generally invested in an account earning interest at market rates.
When can you get the money? "The options will vary, but normally, the employer will simply tell (employees) what is going to happen to their vested account, and what the rules will be going forward. They would be entitled to their vested benefit at the time the plan allows."
The plan may allow for a lump sum or annuitized distribution. I asked Adams whether getting an annuity through an employer would be a better deal than taking the lump sum and buying an annuity on the open market. "It's tough to generalize on things like annuities, but generally one would expect to find better pricing with an 'institutional' buy," he says.
But shop around to make sure.
The decision about whether to take a lump sum or a monthly annuity check is complicated, but most people take the former, says Adams. "I would suggest that you look at how comfortable you (or your adviser) are making those kinds of long-term decisions. Consider how many years you have until retirement, what your other sources of retirement income are, and what kind of monthly benefit the annuity will provide and for what term."
In other words, your employer is not going to decide your pension amount. The fate of your retirement is in your hands.
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