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The past few years have been terrible for so-called defined-benefit plans, which promise a set benefit in retirement. (The plans are the opposite of defined-contribution plans like 401(k)s, which make no promises about future benefits.)
Here's the toll:
- Four out of five defined-benefit plans offered by private companies are underfunded, meaning they don't have enough assets to pay promised benefits.
- The termination of one huge plan -- the one for United Airlines pilots -- sliced retirees' payouts by an average 39%, according to the pilots union. The UAL retirement program is the fourth pension plan with liabilities of more than $1 billion to be turned over to the Pension Benefit Guaranty Corp. (PBGC), the quasi-government agency that insures pensions, since 2002.
- So many huge pension plans have gone belly-up in the past three years, in fact, that the PBGC is now perilously close to needing a bailout of its own. The agency's program for single-employer plans had a $22.7 billion deficit at the end of 2005 -- double the $11.2 billion shortfall from two years earlier.
| Biggest failed pension plans | ||
|---|---|---|
Pension Plan | Claims | Year |
Bethlehem Steel | $3.65 billion | 2003 |
United Airlines Pilots | $1.9 billion | 2005 |
LTV Steel | $1.85 billion | 2002 |
National Steel | $1.2 billion | 2003 |
Pan American Air | $841 million | 1991-1992 |
US Airlines Pilots | $754 million | 2003 |
Trans World Airlines | $711 million | 2001 |
Eastern Air Lines | $553 million | 1991 |
Wheeling Pitt Steel | $495 million | 1986 |
Polaroid | $357 million | 2002 |
Source: PBGC
Right now, PBGC is able to guarantee the pensions of all but the best-paid workers. (Benefits are capped at $49,500 for those who retire at 65, and $32,175 for those who leave work at 60.) Its ability to continue that protection will depend on its continuing financial survival, however.
PBGC limits
If your pension plan is terminated, the maximum annual benefit you can get is capped at the following:| Pension benefit limits | |
|---|---|
If you retire at age: | Your annual pension is capped at: |
55 | $22,275 |
60 | $32,175 |
62 | $39,105 |
65 | $49,500 |
Source: PBGC
Even workers with plans not in immediate peril have reason to worry. Traditional pension plans are going the way of the dodo as many employers switch to 401(k)s or cash-balance plans to escape the heavy costs of defined-benefit programs. Only about 20% of private-sector workers are covered by defined-benefit pensions, according to the U.S. Department of Labor, about half the level of three decades ago.
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Traditional pensions are still common in public sector jobs, which make up about 10% of the workforce. But even these workers need to worry that taxpayer revolts and budget cuts may trim their future payouts.
Harbingers of doom
Here's what you need to watch for:1. Your company is in bankruptcy court -- or headed that way. Bankruptcy experts say few defined-benefit plans survive when a corporation reorganizes. Bankruptcy liquidation almost guarantees the plan will wind up with the PBGC. Sometimes companies file for bankruptcy largely to rid themselves of a pension plan and other expensive employee benefits.
2. Your competitors are in bankruptcy court. LTV Steel filed for Chapter 11 protection in 2000 and terminated its pension plan two years later. Bethlehem Steel and National Steel quickly followed suit. United's move has been followed by similar pension termination action by Delta.
3. Your company's credit is bad. Rating agencies like Standard & Poor's and Moody's evaluate the likelihood a public company will default on its creditors and bondholders. If your company's debt has been rated at "junk bond" status (below BBB for S&P, or Baa for Moody's), that shows it's at high risk of reneging on its obligations -- which could include its payments to your pension fund.
4. Your company is being sold. Check to see if the purchaser has its own defined-benefit plan. If not, start worrying. Companies that don't already have traditional pensions typically terminate or "freeze" the plans of the firms they buy, said pension expert Steve Vernon of Watson Wyatt. Terminated plans are turned over to the PBGC to administer, where your benefits may be reduced if you're a high earner. If the plan is frozen, the company will continue administering the pension and you won't lose benefits, but those benefits will stop growing.
5. Your plan is especially generous. Too-rich pension plans can become an easy target when budget cuts are needed in both the private and public arenas. Oregon's legislature, for example, decided to close the state's Public Employee Retirement System to new hires after a newspaper analysis found that longtime workers got an average 87% of their final year's pay, and one in four pensions were equal to -- or better than -- the employee's final year's paychecks. New hires must now join another, somewhat less generous pension system.
6. Your plan isn't in better shape than it was last year. Most pension plans were devastated by the recent bear market, which whittled away the value of the plans' investments and often forced companies to kick in more cash. But improved stock-market returns the last two years should be showing up in your plan's bottom line. Pension funds are supposed to notify covered workers when they're significantly underfunded, but to monitor the fund's actual investment performance you'll typically need to request Form 5500 from the plan's administrator. (Plans covering fewer than 100 workers file a less detailed document, Form 5500 C/R.) The U.S. Department of Labor offers a guide to reading and interpreting the form.
7. Your plan's administrators, trustees or auditors keep changing. This could be an indication that someone's using creative accounting and trying to keep others from catching on. Embezzlement, loans to insiders and purchases of inflated real estate in return for kickbacks are just a few of the frauds that can be perpetrated on pension funds.
8. The plan's auditor is raising alarms. The word "unqualified" often has negative implications, but it's exactly the word you want to see in the auditor's report attached to Form 5500. If an auditor's opinion isn't "unqualified," it typically means the auditor found some major problems with the fund.
9. Former employees are having trouble getting their benefits. This can be a problem with smaller funds that might not face the public and governmental scrutiny of their large-company brethren. If benefit checks are late or inaccurate, it's time to notify the nearest office of the Labor Department's Employee Benefits Security Administration.
10. Your plan won't give you answers. You're legally entitled to a variety of documents from the plan's administrator, including the summary plan description, a summary of any material changes to the plan, any applicable collective bargaining agreement and the Form 5500 or 5500 C/R mentioned above. You need to make your request in writing and may be asked to pay "reasonable" copying fees. If the administrator balks, you may have the right to bring a lawsuit after 30 days and ask for a $100-a-day fine. You also can get many of these documents from the labor department, but the fact the plan won't provide this basic information should be reported to regulators as a potential sign of trouble.
Ways to swing into action
Other than being a watchdog and reporting potential law violations to regulators, your ability to save a threatened pension plan is somewhat limited as an individual. But here are some thoughts about what you can do to protect your future:- Press for change. This is one of those two-edged swords, since pushing the company to shore up its pension could make executives decide the plan isn't worth the cost. If your company needs smart, experienced workers, you can make the argument that a sound traditional pension plan is a good way to attract them, said Vernon, author of "Live Long and Prosper: Invest in Your Happiness, Health and Wealth for Retirement and Beyond." These are exactly the type of employees, Vernon said, who understand how crucial a good pension can be to their retirement plans.
- Find another employer. If your plan is in trouble, you might make yourself one of those smart, savvy workers mentioned above by seeking out a company that values its employees enough to keep its pension plan properly funded. If pensions are uncommon among your company's competitors, you may need to switch fields to find a decent plan. That's a lot of work, of course, and you have no guarantee your next employer won't trim or terminate the plan. But given how important a pension plan can be in assuring a comfortable retirement, it may be worth the effort.
- Save on your own. This is a smart choice even if your pension plan is in good shape. Most private pension plans don't replace more than 40% of your salary in retirement -- and that's only if you work a few decades with the same company. Social Security can kick in another 20% or so (more if you're a low-wage earner). Public pension plans are more generous, but you won't get much if you quit or change jobs before retirement age.
Most workers need to save additional money on their own, either in workplace retirement plans such as 401(k)s, 403(b)s and 457s, or on their own (IRAs, Roth IRAs or regular brokerage accounts).
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
Published June 20, 2006
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