Pension tension: What to expect if your retirement
plan is terminated
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.
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
"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
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.