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Below are some basic questions you might have about how your pension works and who manages it:
Where are my pension benefits listed?
What does it mean for a pension plan to be “underfunded”?
What can a company do that has seriously underfunded its pension?
How do I determine that safety?
How do I find out if my pension plan is underfunded?
What can I do if my plan is in trouble?
Can I opt out of a plan that is in trouble?
What is the government’s role in protecting my benefits?
What is the Pension Benefit Guaranty Corporation (PBGC)?
Does the Pension Benefit Guaranty Corporation (PBGC) treat multi-employer plans differently from single-employer plans?
Is the Pension Benefit Guaranty Corporation (PBGC) in bad shape financially?
How can I find out if my pension plan is insured by PBGC?
Can the Pension Benefit Guaranty Corporation “take over” a plan?
What if my employer has gone bankrupt (non-sponsored retiree)?
What happens if my company goes bankrupt?
Are my benefits guaranteed?
What is my union’s role in protecting my benefits?
What is the plan’s role in protecting my benefits?
What is my company’s role in protecting my benefits?
What is a single-employer plan?
What is a multi-employer pension plan?
What is a Defined Benefit Plan?
What is a Defined Contribution Plan?
Can my company offer both Defined Benefit and Defined Contribution plans?
What is a Cash Balance Plan?
What is a Target Benefit Plan?
What general information is available?
Would the pension reform legislation Congress is considering help protect pensions?
How will this help workers in Multi Employer Plans?
Where are my pension benefits listed?
Your individual pension benefits are explained in a “Summary Plan Description” provided to you by your employer or your union representative. This guidebook lays out the details of your pension plan. By law, it must be easy to understand. So if there’s something that doesn’t make sense to you, don’t be afraid to ask about it. You have a legal right to know your benefits. Plan administrators are also required by law to provide you with statements on your individual benefits. Make sure you read and understand the content of these statements.
But beware – the SPD describes the details you can expect if your plan is (and remains) healthy. You owe it to yourself to determine the health of your plan.
If you do not already have your “Summary Plan Description” or are not receiving periodic statements, contact your Human Resources Department. If you are a union member, you should also contact your local union representative, or the Pension Benefits Office of your union.
Pension plans must now be registered with the U.S. Department of Labor. So you can write the Department of Labor and request a copy of your “Summary Plan Description” at this address: Public Disclosure Room, N-5638, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington D.C. 20210. Useful pension information is also available at the Department of Labor website: http://www.dol.gov/.
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What does it mean for a pension plan to be “underfunded”?
An underfunded plan is one that doesn’t have enough assets to pay all its required future benefits, even with investment earnings and some level of contributions accumulating in the interim. Unfortunately, this is the majority of pensions today. Now underfunding has become a real problem. Some of this is due to stock value declines, but many plans were in trouble before the downturn. Recent estimates are that U.S. pensions are underfunded by a cumulative $350 billion.
CSFB accounting analyst David Zion estimates that 92% of all pension plans offered by S&P 500 companies are now underfunded, compared with only 24% before the stock market crashed in 2000.
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What can a company do that has seriously underfunded its pension?
A company with an underfunded pension can make accelerated payments to “catch up” with needed funding levels. These payments are called “deficit reduction contributions” (DRCs).
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Will I get my benefits?
The safety of your benefits is tied directly to the financial health of your plan – not your company. There are no guarantees. Your future assets are invested in stocks, bonds, and other financial instruments that involve risk. If not managed properly, they could be underfunded.
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How do I determine that safety?
It is your legal right to know if your pension plan is adequately funded. The best way to find out is by requesting a copy of your pension plan’s most recent annual report summary. You should be able to obtain this document from your Human Resources Department, or your union’s pension benefits office.
Also, every plan administrator in the United States must file an IRS form 5500, which gives detailed financial information about the plan. These forms are available by contacting FreeErisa.
Plan administrators are also required by law to provide you with statements, “Summary Plan Descriptions” on your individual benefits. (For more information, see “Where Are my Pension Benefits Listed?”)
It is also worth checking out the Department of Labor’s 10 Warning Signs that Pension Contributions are Being Misused.
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How do I find out if my pension plan is underfunded?
Look at the “funding ratio” in the pension plan’s annual report. This is the ratio of assets (e.g. stocks and securities) to liabilities (money that must be paid out to retirees). Generally, the higher the ratio, the more fully funded the plan. A ratio below 100 percent is underfunded; a ratio above 100 percent is over-funded.
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What can I do if my plan is in trouble?
Join with others covered under your plan and demand change. Become active in your fund by contacting the plan administrator and your union representatives. Your voice will be heard because your plan’s administrators have a legal obligation to hear and answer your questions.
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Can I opt out of a plan that is in trouble?
Generally speaking, the answer is no. However, now with the Pension Benefit Guaranty Corporation (PBGC) in hot water, there has been more talk about allowing some companies to opt out.
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What is the government’s role in protecting my benefits?
In general, once a defined benefit has been earned, it is partially protected under the Employee Retirement Income Security Act (ERISA) of the U.S. Department of Labor.
The exception to this rule is if the plan becomes insolvent. Then, it is partially protected by the Pension Benefit Guaranty Corporation (PBGC). But it is important to keep in mind that this is only partial protection because the PBGC is insolvent itself.
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What is the Pension Benefit Guaranty Corporation (PBGC)?
If you have a defined benefit pension plan (the type that promises to pay a specific monthly benefit for life at retirement), it is likely that your plan is protected and insured by the Pension Benefit Guaranty Corporation (PBGC). If when you retire, your plan doesn’t have enough money to pay all your promised benefits, the PBGC may take over your plan and pay out benefits up to certain legal limits.
PBGC is a federal government agency that insures and protects the pension plans of 44 million American workers in more than 31,000 defined benefit pension plans. PBGC insures more than $1.5 trillion in defined benefit plans and is responsible for paying out benefits to 934,000 people.
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Does the Pension Benefit Guaranty Corporation (PBGC) treat multiemployer plans differently from single-employer plans?
Yes. The Pension Benefit Guaranty Corporation (PBGC) keeps its multiemployer program separate from its other programs, and it gives better terms and a much better deal to single-employer plans than to multiemployer plans. For instance, the insurance payout is generally much lower for multiemployer plans.
Congress has tried to fix the pension protection for multiemployer plans, but has had limited success.
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Is the Pension Benefit Guaranty Corporation (PBGC) in bad shape financially?
Unfortunately, PBGC is in financial trouble. The U.S. General Accounting Office classifies PBGC as a “high risk” program. In 2003 alone, PBGC took over 152 single-employer pension plans, covering 206,000 people.
The PBGC multiemployer insurance program also had a terrible 2003, getting hit with a $419 million loss, and faced its biggest-ever shortfall.
To make matters worse, the PBGC faces an ever-growing number of bankrupt pension plans. It was running an $11.2 billion deficit at the end of September 2003, and this figure could soar to $85.5 billion if plans that are reasonably expected to fail actually do. So the outlook is grim. And employees should not bank on PBGC to protect them if their plans become insolvent down the road.
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How can I find out if my pension plan is insured by PBGC?
Not all Defined Benefit Plans are covered, so it is important to ask your plan administrator or employer for a “Summary Plan Description.” This document will tell you if your plan is covered. Remember that PBGC does not insure “defined contribution plans” such as 401(k) plans or profit-sharing plans.
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Can the Pension Benefit Guaranty Corporation “take over” a plan?
Yes. When a covered plan is underfunded and in trouble, PBGC can take over responsibility for a pension plan. Using a combination of plan assets and PBGC money, PBGC makes sure that retirees (current and future ones) get pension benefits – but only up to certain legal limits, which can be significantly lower than what was originally promised by the plan.
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What if my employer has gone bankrupt (non-sponsored retiree)?
One good question to ask your plan administrator is: “How many of the plan’s retirees are non-sponsored compared to sponsored participants in the plan?”
A non-sponsored individual is a vested person in a multi-employer plan whose sponsoring company is no longer making contributions to the plan.
This is an important issue. Consider this example (for illustrative purposes only):
An employer has 1,000 employees and files bankruptcy, leaving $10 million in pension liability and $7 million in pension assets. This 70% funding ratio would leave $3 million unfunded. The bankruptcy yields the plan only $600,000 leaving $2,400,000 for the remaining employers to make up.
The employees of the example company become non-sponsored “inactives” or non-sponsored retirees. But they are entitled to receive their full vested benefit, putting pressure on the fund and ultimately the remaining sponsoring employers.
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What happens if my company goes bankrupt?
Large bankruptcies are common, especially in heavily unionized industries. The Department of Labor (DOL) answers some commonly asked questions in “Your Employer's Bankruptcy: How Will It Affect Your Employee Benefits?”
Generally speaking, the assets in your pension should not be at risk if your employer declares bankruptcy. This is because the law requires your employer to keep the pension adequately funded and separate from business assets. Creditors should not be able to claim pension assets.
If your employer files for bankruptcy, contact your plan administrator or your union representative to get an update on how the bankruptcy will affect your pension.
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Are my benefits guaranteed?
No. Your benefits are only guaranteed up to a certain point, and your protection may differ depending on what type of plan you have. Your rights are described in the Employee Retirement Income Security Act ( ERISA).
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What is my union’s role in protecting my benefits?
Employers and unions usually bargain to determine contribution levels. The trustees of the plans then determine what benefits the contributions will buy. The trustees are responsible for maintaining a well-funded plan. A union’s biggest roles are usually in the initial negotiating process and through its consolidated power on the board of trustees.
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What is the plan’s role in protecting my benefits?
Pension plans typically have a board of trustees, in which labor and management are represented. This board manages the pension fund. The board is responsible for making sure that the benefits promised match up with expected investment returns of the plan.
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What is my company’s role in protecting my benefits?
Employers are not responsible for the management of their company’s pension plan.
If you have a single-employer plan, your company plays a role in the sense that it pays the actual contributions that fund your plan. However, your company is not involved in the management of your plan’s assets.
If you have a multi-employer plan, your current company contributes to the pension plan, but an outside board actually manages your pension fund. The board is comprised of representatives from both labor and management.
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What is a single-employer plan?
A single-employer plan is a retirement plan maintained by one employer or a group of employers under the control of a single company. Non-unionized workers are much more likely to have single-employer plans. A single-employer plan can be either “defined benefit” or “defined contribution” (see below).
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What is a multi-employer pension plan?
Unlike single company plans, multi-employer plans cover workers from more than one employer. Such plans are designed for workers in industries where it is common to move from employer to employer.
With a multi-employer plan, a worker who switches employers under the same plan will be covered the same way as he would if he worked with one employer the entire time. Vesting requirements are dependent upon service with any company using the plan, not service with any single employer.
A failure by one or more employers in a multi-employer plan can threaten others. As that employer’s contribution drops out of the plan, other companies have to make up the difference in future contributions.
Multi-employer plans are established through negotiations between a labor union and management. Labor organizations then bargain with additional employers to have workers covered by these plans. The plans are funded by employer contributions, which are negotiated between labor and management.
In most cases, the employer does not have sole control over the plans. They are typically overseen by a board, in which labor and management are both represented.
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What is a Defined Benefit Plan?
Defined Benefit Plans are traditional “backend” retirement plans that promise a fixed monthly benefit for life (much like Social Security) when a worker retires. It can be a dollar amount – say, $2,000 a month – or some percentage of compensation, such as 60% of your last year’s salary. Benefits are calculated by various formulas, but are typically based on years of service and average compensation for some period of time. The employer’s contribution in any given year is not fixed, but is “backed out” of projections of payout required and investment growth before the payout is due to be paid.
Today, many Defined Benefit Plans are in trouble because the cash available to meet these “set-in-stone” monthly payouts in the future are dependent on the ups and downs of the plan’s investment portfolio. When the economy falters or when the stock market is stagnant, the cash required for future benefits grows too slowly or even evaporates. A full 72% of the companies in the S&P 500 have Defined Benefit Plans, and the deficits in these plans amount to a staggering $182 billion.
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What is a Defined Contribution Plan?
Defined contribution plans are “front end” plans. In other words, the amount of employer contributions to the plan are fixed. However, they don’t specify the actual benefits that will be paid upon retirement. There is a formula that defines the contribution (e.g., 40% of your final average salary per year for life).
In these plans, you or your employer (or both) contribute to your individual account under the plan. Usually, these contributions are invested on your behalf. Upon retirement, you receive the entire balance in your account, which is based on contributions plus or minus investment gains or losses. Obviously, the growth of your retirement nest egg depends on the success – and prudence – of the organization that is investing your money.
Defined Contribution Plans are easy to understand. You should receive a regular statement that tells you exactly how much money you have in your account. It’s not difficult to understand a statement that says you have $50,000 waiting for you when you retire. Traditional Defined Benefit Plans can be trickier to understand because they will issue statements that simply say you’re entitled to, say, $1,500 per month at age 65. You are not always given investment details unless you ask.
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Can my company offer both Defined Benefit and Defined Contribution plans?
Yes. Multiemployer retirement plans may be of either type. Sometimes there are even combinations of plans.
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What is a Cash Balance Plan?
A cash balance plan is a special type of Defined Benefit Plan that’s designed to be easier to understand. In fact, the account statements mimic those of Defined Contribution Plans. In Cash Balance Plans, the employer makes an annual contribution for each enrolled employee. Once deposited, the funds accrue interest, and are converted to a monthly pension benefit at retirement.
The reason Cash Balance Plans are supposed to be easier to understand is that the current value of the benefit is defined in terms of a hypothetical account balance. In other words, the fixed level of your future benefit is translated into the amount of cash which should be on hand today (supplemented by projected future contributions and investment growth) that will be sufficient to generate your future benefits when they come due. Each year, your hypothetical account balance is adjusted by crediting the account with hypothetical contributions (e.g., 5% of salary) and hypothetical earnings (e.g., 5%).
One thing to be aware of is that when traditional Defined Benefit Plans are converted to Cash Balance Plans, long-term workers are often worse off. While Cash Balance Plans can be designed with transition rules so that long-term workers are not hurt, not all conversions include such transition rules.
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What is a Target Benefit Plan?
In a target benefit plan, the annual contribution is determined by the amount needed each year to accumulate (at an assumed rate of interest) a contribution sufficient to pay a projected retirement benefit to each participant at retirement age. The exact amount of the benefit is not guaranteed, but contributions to the plan are determined as if the amount were fixed.
In a target benefit plan, age is one of the factors that determines the size of the contributions. In other words, the employer’s required annual contribution is based on the number of years remaining to the participant’s retirement date and the target benefit (e.g., 60 percent of average lifetime salary) under the plan.
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What general information is available?
The Bureau of Labor Statistics offers a good starting point. Also check out these Websites For Additional Information .
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Would the pension reform legislation Congress is considering help protect pensions?
There are provisions being discussed which would no doubt make a difference. It would keep employees better informed about the health of their pension. For Single Employer Plans, it also introduces new funding requirements designed to give employers incentives to adequately fund pensions and to speed up contributions to underfunded plans.
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How will this help workers in Multi Employer Plans?
The current proposals include a plan to close shortfalls in Multi Employer Plans identified as "Endangered Yellow Zone" and "Critical Red Zone." It also improves financial disclosure to workers. But some critics have suggested that the leading Congressional proposals fall short when it comes to the important question of "orphans" in multiemployer plans " workers in plans where companies have either gone bankrupt or made promises to employees they are in no position to keep.
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