Your Pension Plan: An Owner's Guide

If you're one of the millions of people covered by a defined benefit pension plan, you probably don't know much about how the plan works. You certainly can't rattle off the formula the plan will use to calculate your benefit and may not even know if you've earned a vested benefit.

This isn't surprising. Pension plans are complicated, understood thoroughly only by actuaries. Also, unlike 401(k)s, pension plans don't get you involved. Your employer and the pension manager make all the decisions. You don't have a personal account balance and you don't decide where the money is invested. The most you're likely to get while you're still working is an estimate, wrapped in disclaimers, of what your benefit might be some time in the future.

So why not leave your pension plan to the actuaries for now and start paying attention to it when you actually see the money? Because, if you're vested, that money belongs to you even while it's in the plan. And, when you retire, that money will be as important to you as your paycheck is today. So you'd be wise to have more than a vague idea of the rules that determine how much pension money you get and when.

Minding your pension

Inform yourself--You don't have to become an actuarial fellow to understand the basics of your pension plan. You do need to get your hands on and read every piece of information about the plan that your employer provides. The most important document is the summary plan description (SPD). The SPD defines the rules of the plan, including when you earn a vested benefit, how the benefit is calculated, and when you can start getting a benefit. If you don't understand something, ask questions and write the answers down for future reference. Same thing goes for any notices of plan changes: Read them and make sure you understand how the changes will affect you. Also, if your employer provides statements of estimated benefits, look yours over to see how that dry mathematical formula translates into your future income.

Keep a pension file--You won't be able to commit all this information to memory. So do as Allen Engerman, president of the National Center for Retirement Benefits Inc. (NCRB) in Northbrook, Ill., advises: "Open a file on your pension plan the day you start work and keep adding to it until you retire." If you change jobs, start a new file for the new plan. Let the file be your memory.

In each pension file, keep the plan SPD, plan change notices and benefit statements, along with any correspondence you have with the plan administrator about the plan. You also should keep track of other factors that will affect your benefit, such as pay history and any changes in your employment or marital status.

Stay in touch--After you leave a company, don't expect the plan administrator to keep in touch with you. It's your job to keep the plan administrator up to date, especially when your address changes. If the plan terminates or changes hands in a merger, you want the administrator to be able to find you. If you have any pension plans in your past, let this article be a reminder to send the administrators your current information.

When you're ready to retire, contact the administrator of any plan that owes you a benefit. Along with a benefit estimate, you should be able to get details of the factors they use to calculate your benefit. Check these details carefully against the information in your pension file. The smallest error--in your date of birth, for example--can cost you money.

If you need help

Reading SPDs and keeping files is all well and good. But the best records in the world cannot guarantee that you'll understand what's going on with your pension plan or what your options are when you're ready to retire. Your human resources department or the plan administrator should be able to help you. But your old company may have gone out of business or you might want to talk to an objective third party. If you have questions, you'll find that plenty of help is available and that much of it is free. Here are a few suggestions.

When only an expert will do--Contact the American Academy of Actuaries, Washington, D.C., and ask about the PAL (Pension Assistance List) referral service. More than 150 pension actuaries around the country volunteer their time to this program. You can get up to four hours of free consulting about any question or problem related to your pension plan. Ron Gebhardtsbauer, a senior pension fellow with the academy, has been part of the PAL program for several years. "A lot of the questions I get are routine," he says. "People want to know how their benefit calculation was done or how to decide between a lump sum payment and an annuity." PAL actuaries also work on more complex cases, even communicating with a plan administrator on an employee's behalf to resolve a dispute. To use PAL, you can contact the program manager at 202-223-8196.

To check your benefit calculation--The Federal government estimates that 13% of all pension benefits are calculated incorrectly. The errors usually result from administrative slips rather than intentional malice. Every calculation is different. And even experts can get lost in the maze of plan amendments, federal laws and regulations, and business changes that affect yours.

If you question the accuracy of your pension or are just curious about it, call the NCRB at 800-666-1000. It will review your records and recalculate your benefit. You pay for the service only if it secures more money for you. NCRB has found errors resulting in hundreds of thousands of plan participants receiving hundreds of millions of dollars in additional benefits.

If a former employer no longer exists--If a former employer that owes you a pension has gone out of business, your pension is protected by the Pension Benefit Guaranty Corporation (PBGC). PBGC has a Pension Search program that helps reunite former plan participants with their lost benefits. To use Pension Search, check the missing pension list on PBGC's Web site; write to Pension Search Program, 1200 K Street, N.W., Washington D.C. 20005; or call PBGC at 800-400-7243.

Published February 10, 2003