|
Pension plans: The outlook today
"Change is the law of life," John F. Kennedy told us. And nowhere has that been truer than in the long struggle by unions to make sure that working men and women can go into retirement with decent pensions.
The good news on pension plans
For decades, the "traditional" defined-benefit pension—paid for by employers—was the foundation for retirement for millions of workers. It still is for 44 million active and retired workers—many of them union members.
UNION WORKERS ARE MORE LIKELY TO HAVE
HEALTH AND PENSION BENEFITS, 2005
Note: Defined-benefit pension plans are a subset of all pensions. Disability refers to short-term disability benefits.
Source: U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2005.
Prepared by the AFL-CIO.
Pension plan regulation and security
Pension plans are heavily regulated, which adds to their overall security. The overall framework for the design, funding and administration of non governmental defined-benefit pension plans is provided by the Employee Retirement Income Security Act (ERISA). In addition, pension plan benefits are guaranteed to certain levels by the Pension Benefit Guaranty Corp. (PBGC).
The funding level of a defined benefit pension plan is one measure of its ability to pay the promised benefits. Another is the stability of the employer(s) and their ability to make necessary ongoing contributions to the pension plan. The Pension Protection Act of 2006 (PPA) provided a new framework for funding defined benefit pension plans and increased the requirements to communicate this type of information to the participants.
The bad news on pension plans
The number of companies willing to sponsor traditional pension plans is shrinking steadily. Employers continue to freeze or terminate their defined-benefit pension plans as they look for less expensive options.
In recent years, massive bankruptcies in the aviation, steel and other industries dumped $18.9 billion in lost pension claims on the PBGC—raising fears that a taxpayer bailout might be required.
So far, the PBGC has held steady and, in 2006, the agency paid $4.1 billion in benefits to 1.3 million workers and retirees.
The corporate search for less costly pension plans has led some employers to swap their defined benefit pension plans for 401k retirement plans, which are funded mainly by employees.
Other employers have moved to hybrid cash balance-style pension plans, which also are less costly than defined benefit pension plans. However, because cash balance plans reduce future benefits for older workers, they are a subject of continuing controversy.
IMPORTANT: The key is for you to find out how secure your pension is by asking the questions below.
Pension plans defined – Thinking about your pension>
What flavor is your pension?
-
Defined Benefit Pension Plans (DB):
These pensions are paid for by your employer, who promises you a specific monthly payment when you retire. The benefit generally is based on a combination of your salary and your years of service.
If you're married when you retire, you'll have this choice: Take the full monthly payment for as long as you live; or take less money and leave a monthly benefit for your spouse after you die.
-
Defined Contribution Pension Plans (DC):
A popular example is the 401(k) retirement plan. You contribute a portion of each paycheck, and you invest the money in mutual funds available from your company. The company also may match part of your contribution.
When you contribute, your money goes into the 401k retirement plan before taxes are deducted. Taxes can be deferred until age 70½ , when the IRS will ask you to start making withdrawals. The size of your retirement nest egg will depend on your contributions, plus or minus investment gains or losses.
-
Hybrid (Cash Balance) Pension Plans: Your employer will credit you with a percentage of your pay each year plus interest at a rate determined by the company. The employer controls the funds held by the plan and its investments. Your "account" is merely a calculation of your accrued balance. If you retire at 65, you can convert your balance to an annuity for life or, at some companies, take a lump sum. If you are married, your spouse will have to consent to a lump-sum pensions option.
For more information on cash balance pensions plans, see Frequently Asked Questions about Cash Balance Pension Plans.
Things for you to do so you understand how pension plans work
Keep an eye on your pension plan: Become familiar with the types of pension options available to you and the formulas used to calculate your retirement benefits. Find out the following about pension plans:
- When you join a pension plan, you will get a Summary Plan Description (SPD), which will tell you how the plan works. If the SPD isn't easy to understand, ask your company benefits person or your union representative for an explanation.
- What type of pension plan you have—Is it one of the defined benefit pension plans, defined-contribution pension plans or cash balance pension plans?
- When you can start participating in the pension plan.
- How service and plan benefits are calculated. Pension benefits typically are based on a combination of how long you work and how much you earn.
- When pension benefits become vested. There will be a "vesting period," or a certain number of years you must work before you are eligible to receive benefits, usually between one and five years.
- The financial consequences of retiring early.
- When and in what form benefits are paid.
- How to file a claim for pension benefits.
- Is your plan underfunded or overfunded? The answer may be a clue to the health of the plan.
- Keep a pension file that includes your SPD and any plan statements or reports you receive.
Learn more about safeguarding your pension at these Department of Labor Web sites:
Finding your lost pension: If you changed jobs after becoming vested in one of the pension plans at a previous employer, you may be entitled to pension benefits from that job—even if the company went out of business. You can search here or read this booklet on finding a pension plan.
PBGC: The Pension Benefit Guaranty Corp. is a federal insurance agency, which pays workers' benefits if their employers get into financial trouble and terminate their pension plans. Check out who they are and what they guarantee here.
What about benefits for my spouse?
One of the most important decisions you will have to make when you retire is how to take your pension. Different pension plans offer different choices. Some companies will let you take a lump sum according to the pensions plans available to you. Others will not. Most companies will let you take your maximum monthly payment for as long as you live—if your spouse agrees. If you are willing to take less money each month, you will be able to leave half of your monthly payment to your spouse after you die. It is very important to fully understand the pension plans to understand all the choices that you have.
Example: Your maximum pension is $2,500 a month. You decide to take a 50% spousal benefit. You then get $2,200 a month. When you die, your spouse gets a 50% payment of $1,100 a month.
Note: Some pension plans offer 75% and 100% spousal benefits. The rule is: the less money you take each month, the higher the payment you can leave for your spouse. Make sure you understand your choices and the different pension plans.
Thinking ahead: Before any decision about pension plans, draw up two estimated retirement budgets. The first should show you how much income you and your spouse will need while you are both alive; the second should show you how much income one of you will need after one of you dies. The results will help you make the right decision.
A lump-sum caution: If you opt one of the lump-sum pension plans, tell your benefits person that you want to do a direct transfer of your money to an IRA account, which avoids a big tax bite and allows you to invest the money for future growth. Mutual funds, banks and other investment companies will be happy to help you open a new IRA account.
How is your pension affected if you leave your job?
If you are vested in your employer's pension plan and you leave your job before you reach the company's official retirement age, the answer will depend on these factors: your age, years of employment, your accrued pension benefits and the rules of your pension plan. Ask your employer's benefits person or union representative to explain your options for retaining some of your pension plan benefits for your retirement.
Top of Page
|
