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Is Your Retirement Money Safe?
By Jeff D. Opdyke and Kelly Greene, The Wall Street Journal
May 12, 2005
UAL's Move to Default Highlights Range of Risks and Protections For Different Types of Plans
The largest pension-plan default in U.S. corporate history raises a question of paramount importance to anyone with a retirement plan: Could this happen to me?
The short answer is yes. But the level of risk -- and what you can do to protect yourself -- depends on what type of retirement plan your company offers.
There are two major types of plans. One type is the traditional pension, which is also known as a defined-benefit plan because it promises a fixed benefit when an employee retires. The other, more common variety is a
defined-contribution plan such as a 401(k), in which employees or employers (or both) make contributions but which offers no guaranteed payout.
It's with traditional pension plans, like the ones that United Airlines parent UAL Corp. wants to default on, where most of the problems occur. Companies terminate pension plans all the time, either because of a bankruptcy, a merger or a conversion into a 401(k)-type system. The problem is that pension money doesn't technically belong to an employee until it's paid out, and thus is sometimes vulnerable to the company's fortunes. Benefits are guaranteed by the Pension Benefit Guaranty Corp., a quasi-government agency that takes over failed pensions. Currently, it protects only up to $45,614 a year.
By contrast, defined-contribution accounts like 401(k)s legally belong to the employee. That means that you're generally protected even if your employer goes bankrupt. But there have been cases of fraud. In some situations, for example, an employer collects 401(k) contributions from workers' paychecks, then fails to deposit the money in the workers' investment accounts. There were 1,269 cases of missing 401(k) money reported last year, a sharp increase from the 34 cases reported in 1995.
![[United Airlines employees picket outside the company's bankruptcy hearing yesterday.]](safe.h3.jpg)
United Airlines employees picket outside the company's bankruptcy hearing yesterday.
There isn't much formal protection against 401(k) fraud, and recovering misused funds is extremely difficult. The federal government requires annual audits for retirement plans with at least 100 workers. But that leaves out most 401(k)s and other defined-contribution plans. According to the Labor Department's most recent statistics, 627,905 such plans covered fewer than 100 workers in 1999. Only 55,195 such plans fell under the rule that requires audits.
What follows is a look at the risks inherent in the main types of retirement-savings plans, how you can protect yourself and the safety nets that are in place in case of problems.
Defined-Benefit Plans
What They Are: Traditional pensions that promise a guaranteed monthly payout at retirement. They are common at industrial and heavily unionized companies such as autos and airlines.
The Risks: That the company you work for files for bankruptcy-court protection, and has underfunded its plan so that it doesn't have enough to cover promised benefits.
In that situation, you could see your benefits at retirement shrink. But that's only if you're a highly paid worker. Lower-level employees are usually fully protected, and top executives often have separate pension plans that are protected even in the event of bankruptcy.
How to Protect Yourself: Though the risk your company would default on its pension obligations is small, it's wise to stay on top of your pension plan, particularly if you're nearing retirement.
Every year, pension plans distribute to each participant a summary of the assets and liabilities. Those assets are held in trust and are generally out of reach of the company. Still, if you work for a company with shaky finances, or one that's in an industry being buffeted by change -- such as autos, steel or airlines -- you want to pay special attention to how much the liabilities outweigh the assets.
If you're near retirement and expect your benefits will exceed the PBGC maximum, and if you have financial worries about your employer, one option at some companies is to take a lump-sum payout -- and then buy an annuity that will pay you a monthly sum. You may get smaller monthly payments this way, but it protects you if your former company defaults.
Last year, companies terminated 1,381 defined-benefit plans. The vast majority were fully funded at the end, meaning workers ultimately will receive 100% of their accrued benefits. Yet 192 were taken over by the
PBGC.
The Safety Net: Your level of protection depends on the circumstances in which your company defaults on its pension.
In a so-called standard termination -- which accounts for the bulk of all pension-plan deaths -- a company has enough to cover the full benefits promised to workers. In this case, the company purchases for every worker an annuity that guarantees to pay the same monthly benefit an employee would have received if the pension plan had not died. In essence, workers lose nothing.
In a "distress termination" -- like the UAL situation -- the PBGC steps in. Plans become distressed when companies fall into bankruptcy and the plan is so underfunded that it isn't likely to survive on its own.
At that point, no more benefits accrue. Thus, wherever you are in your career, your benefits are calculated at that point. Younger workers with minimal time on the job will earn a smaller benefit when they hit 65. Higher-paid, longer-tenured employees will receive the most -- though often much less than they were originally promised by their employer.
The PBGC limits pension payments to a current maximum of $45,614 a year, or $3,801 a month. But if your benefit check is smaller than that, you'll get 100% of what you're due at retirement.
In most cases, retirees already earning a check and who retired at age 65 are likely to continue receiving 100% of their promised benefits if their former employer defaults on the pension plan. However, workers who retired early with a generous payout package are more likely to see their paychecks cut back, since the PBGC reduces the payout if you retire before age 65.
Defined-Contribution Plans
What They Are: 401(k)s, 403(b)s, money purchase plans, profit-sharing plans
The Risks: With defined-contribution plans, the most common risk is that the worker won't do a good job managing his or her own investments, since many plans are self-directed.
But theft is also an increasing problem, and it can go undetected for years since the overwhelming majority of plans have no audit requirements. In many cases, crooked employers simply collect 401(k) contributions from their workers' paychecks but never deposit the money into the workers' investment accounts.
Meanwhile, the resources devoted to regulation haven't kept up with 401(k) contributions: Workers doubled their investments in such plans to $1.8 trillion from 1995 to 2003, but the number of federal investigators into 401(k) irregularities rose 38% from 1995 through the current fiscal year.
Ann Combs, assistant secretary of the Employee Benefits Security Administration, says the agency has "a strong track record" of working with the Justice Department and other federal investigators of criminal activity "to make sure retirement assets are safe and those who misuse them are prosecuted."
How To Protect Yourself: Make sure you're getting all your defined-contribution statements, and make sure the amount deducted from your paycheck matches the amount deposited into your 401(k) account. (There's a list of warning signs that pension contributions are being misused at www.dol.gov/ebsa.) Another option is to roll your money into an individual retirement account when you retire so you're no longer in jeopardy if something goes awry with a company plan.
The Safety Net: There's no way to recoup investment losses in a 401(k), and recovering retirement funds that are misused or diverted can be difficult as well.
The Employee Benefits Security Administration last year recovered $31.6 million in 401(k) assets, but the agency says it can't calculate what portion of the lost assets that represents because restitution can take several years.
Last month, the Labor Department beefed up its "Voluntary Fiduciary Correction Program," which is designed to help employers, particularly small businesses, correct 401(k) withholding violations. It also proposed new rules in March to help get workers' and retirees' savings released from 401(k) plans that companies have abandoned -- an estimated $868 million in assets each year covering 33,000 workers.
Deferred Compensation
About 70% of companies offer deferred-compensation plans, which include everything from salary to stock options, allowing managers, directors and others to shield income from taxes until they retire or leave the company. The chief risk to these programs is that the company may file for bankruptcy.
In that case, you're an unsecured creditor. "You're having to hope and pray that the company is going to be around long enough to pay you off," says Bruce Wynn, an Atlanta lawyer. If your employer is acquired, your deferred compensation is treated like a contract -- but it still could be a negotiating chip.
There's another risk as well. A new tax law makes it tougher for executives to take an early payout from their deferred compensation. Executives who fail to meet new requirements would have to pay tax immediately, along with interest and a 20% penalty.
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