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How healthy is your company's pension plan

By: Laura Bruce

Bankrate.com, March 17, 2003

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 benefits.

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 $400 million.

"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 years.

Each year, you should also request, in writing, your individual benefit statement. It tells what benefits you have accrued and vested.

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 retire early.

"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 my pension."

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.