Keeping an eye on your pension fund means keeping an eye on your company. Its financial status, a sale or takeover or changes in policy can have a huge impact on your future benefits.
"Individuals really have to be informed consumers . . . and realize nothing in this life is guaranteed," said Denise Loftus, manager of Work Force Education at the American Association of Retired Persons.
Traditional pension plans that pay fixed benefits can be threatened in two ways: Your company could fail, or it could decide to end its plan. In either case, even though benefits
you've already earned may be insured, you still take a big hit. That's because a typical pension plan provides disproportionately larger benefits for the later years of employment. It's often the case that a worker earns half the benefit in the first 30 years and the last half in the last 10 years, said Donald S. Grubbs Jr., a Silver Spring pension actuary and consultant.
"If the plan terminates when you're 55 and you'd been planning to work until 65, you're only going to get about half the benefit you would have gotten," he said.
To make matters worse, the benefit is figured in today's dollars and is fixed even though it won't be paid until years later, when those dollars will be worth much less because of inflation. If you could have stayed in a plan until retirement, your benefit would be improved because it's normally based on salary and years of service. Both of those would have been higher.
When a defined-contribution plan, such as a 401(k) or Employee Stock Ownership Plan ends, employees receive a lump-sum distribution. To preserve the tax advantages, they need to roll over -- or reinvest in a qualifying retirement plan -- the distribution.
If you think there's little chance that your pension plan might be terminated, think again. Companies have the legal right to end a plan and are doing just that in increasing numbers.
According to the IRS, more plans were terminated last year than were started. Employers ended 16,300 defined-benefit plans and defined-contribution plans in 1990 but started just 1,900 defined benefit plans and 11,400 defined contribution plans.
Pension actuaries lay much of the blame for the drop in plans, especially defined-benefit plans, to the burden of complying with federal rules.
"The problem with defined-benefit plans is that many plans are being terminated, especially by small companies," said Robert Preston, a Connecticut pension consultant. "In some cases, higher medical costs soak up the dollars. But companies are just fed up with the regulations; they're tired of the hassle. The average employer doesn't understand how onerous running a plan is, and when they find out, they drop it."
A study, however, by the Pension Benefit Guaranty Corp., the government agency that insures private defined benefit plans, laid the blame on structural shifts in the economy. What was responsible, it concluded, was the shrinkage of heavy industry, where defined-benefit plans are concentrated, and the growth of the service sector, where defined-contribution plans are more common if a retirement plan is offered at all.
And, while many companies substitute a defined-benefit plan with a defined-contribution plan that allows workers to make tax-deferred contributions, such plans usually do lower-paid workers little good, said Karen Ferguson, director of the non-profit Pension Rights Center. That is because a low-paid worker often can't afford to set aside any part of the paycheck. Furthermore, a defined-contribution plan doesn't guarantee any monthly benefit at retirement and, in fact, is often raided -- by the worker -- before he even gets to retirement.
Yet another wrinkle involves what happens when a financially solvent company decides to terminate its pension plan. The government requires it to use the pension funds to buy annuities from insurance companies that will make certain workers, including those not yet vested, receive benefits they had earned up to that point. The problem is those benefits won't be paid for some years, when they retire.
The PBGC, however, says its responsibility to insure a pension ends once a plan is halted and annuities are bought; it does not insure the annuities although it does scrutinize the choice of an issuing company.
"The choice of an insurance company is part of the fiduciary responsibility that requires pension administrators to be prudent and wise," said Robert Liebross, a pension attorney with the AARP. "But what constitutes prudent and wise is up in the air. There is a dispute on what criteria should be used."
Companies also can change plan rules to slow or freeze improvements or even reduce benefits.
"They can change the plan as long as they don't reduce the benefits someone's already earned," said Cathy Ventrell-Monsees, manager of advocacy programs at the AARP.
While employees don't have a legal recourse to stop a company from tinkering with its plan, sometimes they can apply pressure if they know about such plans ahead of time. In at least one case, Ferguson said, picketing employees stopped a company from raiding its pension plan.
"An employer is less likely to make changes that will hurt you if he knows that employees are watchful."
There also is little that a worker can do if his company goes broke and the pension fund is underfunded.
"From a lay person's point of view, your pension is only as healthy as your company," commented the AARP's Loftus.
PBGC spokeswoman Jane Hoden said that, while pension underfunding is not necessarily cause for alarm, it can be. "A low funding ratio coupled with serious financial problems -- bankruptcy, a fall in stock market values or low bond ratings -- are indications of plan termination," she said.
Liebross, the AARP attorney, suggested some other red flags: a history of layoffs, bonuses and raises being frozen, salary givebacks and, if you're in a position to know, whether a company is late paying its bills.
While in most cases the PBGC guarantees basic benefits, employees still lose out on the higher benefits they would have earned if they could have worked until retirement. They also lose out on any prospects for improvement -- benefits guaranteed by the PBGC are frozen.
If a company's financial future appears dim, Loftus said, workers might ask themselves if they have any options to pull out what they've already earned and get another job.
In all case, employees should keep track of where they stand.
Ferguson advises examining your individual employee benefits statement. Available from your plan administrator, a benefits statement tells you how much pension you will get at age 65 if you left your employer now.
"You need to know exactly what you will get," said Ferguson. "A lot of disappointment results from not reading carefully. Know what you can count on getting now if the company decides to stop your plan."
"The big problem is that these statements include projections [which project what you pension would be if you worked until age 65]," Ferguson added. "People tend to read that instead of what you've earned to date -- the accrued vested benefit. And benefits for a surviving spouse or early retirement will reduce that. People should ask the plan administrator what would happen if the company stopped the plan today."
The question to ask, she said: "Just what benefits would I get?"