7/27/2012 3:30 PM ET|
Is your pension safe?
If a defined benefit pension is part of your retirement plan, there's good news and bad news. Find out what you need to know to protect yourself.
The big attraction of traditional pensions is their promise of security. They're designed to provide to a steady stream of checks in retirement to last the rest of your life. Unlike a 401k or other workplace contribution plan, what you get from a defined benefit pension doesn't depend on how much or how well you invest.
"Even during a downturn, (retirees receiving pensions) know how much they're getting on a monthly basis," said Karen Friedman, the executive vice president and policy director of the Pension Rights Center. "They know how much they can spend."
Increasingly, though, that promise of security is being broken. Lousy investment returns, changing company policies and taxpayer concerns about public retirement benefits are putting many pensions at risk. Consider:
- Nearly 80% of the private pension plans covered by the Pension Benefit Guaranty Corp., or PBGC, are underfunded, to the tune of $740 billion. The news is even worse among the nation's largest companies. Only 18 defined benefit pension plans offered by companies in Standard & Poor's 500 benchmark are fully funded.
- More than 1,400 companies shut down their pension plans in fiscal year 2011, compared with 1,200 in 2009, according to the PBGC. An additional 152 plans failed, meaning they were terminated without enough money to pay promised benefits and were taken over by the PBGC. The PBGC itself, which is funded by employer-paid insurance premiums, is running a $26 billion deficit.
- Public pension funds are underfunded by at least $1 trillion, according to a report by the State Budget Crisis Task Force. To close the gap, 35 states have reduced pension benefits for their employees, and half have increased worker contributions to their plans, according to a report released in March by the U.S. Government Accountability Office. Three states -- Georgia, Michigan and Utah -- have implemented hybrid plans that include defined contribution plans, similar to 401k's, that shift some investment risk to workers.
- Even fully funded retirement plans aren't exempt. General Motors, once considered the model for running a solid pension plan, shocked its salaried retirees by announcing it was offloading their pensions to Prudential Financial. About 42,000 retirees had to make the difficult decision whether to take a lump-sum settlement or trust Prudential to send them monthly checks.
"These are the folks who thought they were totally protected, and then the company lays this on them," Friedman said. GM's move may give other companies the "green light" to consider similar actions, she said.
Traditional pensions are on the wane, but plenty of people still have them. Private plans cover nearly 44 million people, according to the PBGC, and public plans cover about 23 million (15 million active members and 8 million annuity recipients), according to the Census Bureau.
If you're one of them, here's what you need to know:
Everything changes. That's the bad news and the good news. Plans can be frozen, shut down or altered, changing how much you can expect in retirement. But investment climates change as well. "Pension funding is very cyclical," Friedman said. "What's underfunded now could be adequately funded in a couple of years. It's not a cause for panic."
Friedman does recommend reviewing the annual benefit and funding statements your plan sends so you can gauge its health. Anything below 80% funding is cause for concern. Although you can't do much to correct an underfunded plan, you can let the company know you want the benefits you've been promised.
"Make it clear to your employer that you value your pension," said Rebecca Davis, the Pension Rights Center's legal director.
The private plan benefits you've already earned are protected (pretty much). Companies with private plans can change the rate at which you earn future benefits, including ratcheting that down to zero if the plan is frozen or terminated. But companies typically can't mess with benefits you've already earned. Federal law protects "vested" benefits -- those that you've earned after working for a certain number of years. The plan may require you to work five years before you're 100% vested, for example, or it may offer gradual vesting, so that you would be 20% vested after two years, 40% at four years and 100% at seven years.
If your plan fails, however, there's a risk for higher-paid workers. If the plan is underfunded when it's terminated and the company can't cough up the needed cash, the PBGC usually steps in, and the amount it can pay retirees is capped based on age. For a 65-year-old, the cap is $4,653 a month, or just under $56,000 a year; for someone who's 55, the cap is $2,094 a month or about $25,000. Since the median private pension benefit was less than $8,000 in 2008, that means most workers will get everything they've earned, but some longtime employees with high earnings can take big hits.
Already-earned public plan benefits are usually protected, too. The PBGC protects only private sector plans, but state constitutions or other laws typically guard the benefits already earned by public sector workers. That's why most states that have trimmed benefits have done so only for new hires, although some have also done so for retirees and current workers. Many state and local governments have required workers to increase their contributions as well. (Unlike most private plans, which are employer-funded, public plans typically involve both employer and employee contributions). The Center for State and Local Government Excellence has an interactive map of changes governments have negotiated in public plans.
Older workers face particular risks. Most pensions are designed to give extra weight to your pay in your final years of work. If your plan is frozen or terminated while you're in midcareer, you typically lose the significant boost that higher earnings in your 50s and 60s could have given your benefit.
You need to save. It should be clear by now that relying solely on pension promises is risky. If your company also has a defined contribution plan, such as a 401k or 403b, you should be putting in enough to get the full match, if there is one. Even if there isn't a match, your contributions typically offer a tax break. If you can't contribute to a plan at work, consider putting money into an IRA or Roth IRA.
Keep track of your plan. Your worries aren't over if you leave your job. The Pension Rights Center says it regularly hears from people who have lost track of a plan after a previous employer closed or merged. Others wind up having to prove they're owed benefits. The center recommends retaining records of your employment history (such as your W-2 forms), getting a copy of the plan's most recent summary plan description before you leave and making sure the company and the plan have up-to-date contact information for you. For more, read the center's "Tips for Keeping Track of Your Pension." If you're having problems with a pension or 401k, you may be able to get free legal advice from the U.S. Administration on Aging Pension Counseling and Information Program, which serves residents in 30 states.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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speaking of the economy/social security i say go to we the people where i have created a petition because of these financial issues our country face.
Here's some more information about this petition:
Reform Social Security To Allow All Who Have Completed Their
Quarters To Withdraw Their Monies (All or Partial) Untaxed!
Take into consideration that if all employee's( I mean all) receive a donation from the employer & the employee matches the donation ,plus whatever extra the employee would like to donate,now but not now the money that is donated is put in the employee's bank which stays there untill retirement ( no withdrawels before ) employee can invest the money but no withdrawels...
what happens now is when a person retires we still have to pay for it one way or another,with the plan above when a person retires we no longer pay towards his retierment,plus the employee has all of the money that was saved for retirement,this plan sure would change the way of living,it sure would be great if someone would take this plan into consideration.
pensions please. i am gen x mid 30's and we are saving 1/4 to 1/3 of our income annually for retirement. We are going to get taxed down the road b/c "we can afford it". Pensions are unsustainable at there current structure. private pensions will just disappear over the next 30 years. Public ones are a larger problem. i am not in favor of public pensions until employees are required to contribute a minimum of 15% of their pretax income for 30 years in order to recieve them at current levels. my buddy has same job as me and works for state and gets 2% of his income (avg over last few working years) for each year he works for state - no max. he says he doesn't contribute much - at most 5% - amount is adjusted annually. he's not even in the cadillac plan like older generations are in. he gets unlimited build up of sick days. he doesn't use them and is planning on padding his salary his last few years - who cares if he only gets 25 cents on the dollar. let's not mention vacation, holidays, personal days, and healthcare. He thought about changing jobs but the perks are to damn good. this whole system is mainly funded by the private taxpayer. oh wait we do get our 4% match. we talk about taxing millionaires b/c it's not fair to rest of us. how about let's take a look at public pensions and how many of them are valued at over a million dollars.
jcbozark your a liar and the truth is not in you! I done the math idiot. I even gave you the benefit of the doubt about taxes on you 401k. If your 401k is a traditional one, not a roth, then it is taxed 20%. Second you said you were a few years from being eligible for social security. That makes you in your mid to late 50's. For simplicity I said your age was 55. Now any retirement annuity you purchase is likely going to be for at least 20 years. So based in that if what you have is all you have, 200,000 dollar 401k, and 180,000 reverse mortgage which is also likely set up on at least 20 years then your monthly income before health insurance is likely around $1583 dollars. Oh yea I also assume your single, divorced, or widowed. In short I assume your alone. If your smart you will buy some form of health insurance at $300 dollars per month for a single person. Then you spend at least $400 dollars per month for groceries, again for a single person. Other utilities at least $300 dollars. Gas for your vehicle at least $100 dollars per month. Just the basics is a grand total of $1100 dollars in bills per month. Assuming your the luckiest guy in the world and never have bad luck then you have about $483 dollars per month to save for your extravagant trips. So that leaves you about $5700 per year to go to Europe on. LOL. Please feed the bull to someone who believes your lies. If your living the luxury life your are trying to feed this message board then you got something else coming in and don't lie. Such a crock of bull. What a liar you are. Come on be honest you have a pension as well. Did'nt your mother teach you not to lie? If you are truly living soley off what you say you are then you are taking no trips to Europe! You are barely surviving and praying to grow older so you can get your social security. Liar!!!!!!!!!!!!
Apparently we should all jump ship and join the spammer crap site...Hit 'spam' on each of them - I believe it takes 5 unique 'spam' reports to get rid of them..
Back to the matter at hand - I firmly believe there is a great deal of risk relying on a pension's solvency and social security as a 'retirement' plan. If you are lucky enough to have one (I am not in that camp), do insure your future by contributing to an IRA or 401(k) or other qualified plan - even the smallest savings over years can provide a nice buffer and gives YOU some measure of control. I have a 401(k) that I have contributed an average of 14.8% since my late 20s. Additionally, I save an already taxed amount and invest in stock. By my projected calculations, I'll be able to retire 8 years before full retirment age and the dividends in the stock account will more than pay for health insurance ect between retirement and full retirment age. Home will be LONG since paid off, principal and interest saved up to retirement date to boot (as if it was not paid off, but the 'interest' goes to me not the bank). Do take some control - alleviate the worry of some cold company cutting your benefits.
The problem with all these plans, whether they are private or public is that they function under the same formula as the Social Security program. They have all assumed that the cash provided by new hires and/or taxpayers combined with an ever expanding economy and tax base would provide the funds needed to pay the benefits of future retirees. That type of thinking worked well enough when the US economy dominated the world and foreign competition was no where to be seen, but in a world economy in which we have to compete with an increasing number of significant players the concept of a never ending expansion of the US economy is not rational. Bottom line is that a lot of people who have been making retirement plans based on what their employer has been promising them, be they public or private sector workers, are going to be coming up short.
Retirement Heist was a great book about this subject. I recommend it. You can get it used on Amazon or E-Bay at a reasonable price.
IMHO I believe that since these same dating/scam website advertisements continually appear in every article, and the moderators have made no attempt to remove them; they are advertisers paying MSN.
MSN should stipulate that their messages are advertisements and advertisers should not be allowed to pollute the boards
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