Pension or "defined benefit" plans are in a state of decline in more ways than one. Thousands of pension plans have been terminated in recent years. The vast majority of them were fully funded, but were frozen by healthy companies, like IBM, Verizon and Hewlett Packard, looking to save money. Typically in this case, existing benefits owed beneficiaries remain intact, and plan participants and future hires are switched to 401(k) plans, often with a company match.
The damage is done to retirement dreams when struggling companies default on underfunded pension plans. This has happened all too often in recent years, affecting hundreds of thousands of workers and retirees. In this case, the administration of the plan is turned over to a government agency, the Pension Benefit Guaranty Corp. (PBGC). The problem is that the PBGC caps its benefits at around $58,000 a year for married 65-year-old plan participants, which might be significantly less than a pilot, say, would be expecting when she retires 2 years from now. Retirees already receiving pay-outs may also find their benefits slashed depending on their age of retirement, how underfunded the plan was, etc.
So what can you, as a pension plan beneficiary, do to manage this risk?
1. Keep track of your company's debt ratings - if the bond market is worried about your employer's ability to pay obligations, you should be too.
2. Ask your human resources department about the funding status of your plan - you are entitled by law to know.
3. If you feel like your employer is an accident waiting to happen, it may make sense either to retire early, to take a lump sum, or even to switch jobs.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses. To contact Paul, please click here.