Not
long ago, your parents and/or grandparents who toiled
long and hard for the local utility company, chain grocery/department
store, or automobile manufacturer would be rewarded for
their years of diligent service with a nice gold watch
and a company-funded retirement nest egg for life.
Corporate
pensions, or defined benefit plans, were the gold standard for retirement security
for post-World War II America. But with the recent financial hardships
of such companies as General Motors’ auto parts subsidiary Delphi Corporation
and Delta Air Lines, and the well-publicized demises of Enron and WorldCom,
employees are becoming aware that they should be more responsible for their
own retirement (and that employers shouldn’t invest all their employees’ retirement
funds only in company’s stock). Which brings this question: Has
the death knell sounded for the pension plan?
One nail
in the pension coffin may have been struck on June 2, 2006, when bankrupt Delta
Air Lines announced it was ending its pilots’ pension plan. IBM
closed its traditional pension plan to new hires starting in 2005 and announced
that those hired earlier will have their benefits frozen after 2007, compensating
for this development by doubling its 401(k) matching contribution for recent
hires. These are only two of many examples of companies shifting
away from traditional pensions or terminating them altogether and moving into
401(k) plans.
Some
may view the elimination of the legendary pension as
a betrayal of workers. Others may see it as a necessity
to keep the economy strong. So why are pension
plans on life support? One reason is that corporations
can no longer afford to fund them and continue to pay
health benefits to retirees. According to
Lisa Tavares, a benefits associate at Venable LLP in
Washington, D.C, companies’ shareholders want their
stock to be as high as possible, and the value of the
stock can decrease because of the drain caused by maintaining
pensions. This is a likely scenario at General
Motors, a corporation with a reputation for generous
employee pension plans. GM is now having to trim
costs by closing plants due to falling automobile sales.
Another
reason is that companies are heeding the advice of financial
planners and other economic experts to have their employees
save more of their own funds for retirement, through
such vehicles as 401(k) plans which are sometimes matched
by company contributions, 403(b) plans (tax-deferred
annuities, mostly for teachers and employees of tax-exempt
companies), individual retirement accounts (IRAs), or
the new Roth 401(k) plan.
One
of the economic experts touting the benefits of employees
saving for retirement is the Employee Benefit Research
Institute (EBRI), creator of the “Choose to Save” campaign. Its
president and chief executive officer, Dallas Salisbury,
told the Baltimore Sun that he was a fan of traditional
defined benefit or pension plans, even though changing
economic times have put more of the retirement responsibility
on the employee. “If the offset [of employee
saving] is that companies start aggressively encouraging
people to save and provide financial literacy education,
that may be a positive silver lining,” he said
in the Sun. Unfortunately, many people don’t
save enough for retirement, perhaps because they don’t
feel they have enough knowledge to navigate the financial
markets, they may not earn enough in salary to contribute
to a retirement account, or they may have other more
pressing financial obligations. One disadvantage,
however, of company-funded pension plans was lower salaries
for employees, with expectations of a generous lifetime
retirement plan at the back end.
What
if your company’s pension is on the verge of extinction? What
if your company is planning to terminate its pension
plan due to severe financial difficulties? (Does
your company still offer a pension, for that matter?) Be
aware that traditional pension plans are protected by
the federal Pension Benefit Guaranty Corporation (PBGC),
sort of an FDIC for pensions. If a plan is terminated
because an employer has financial difficulty and cannot
fund the plan, and the plan does not have the funds to
pay the promised benefits, the PBGC assumes responsibility
for the plan. The PBGC pays pension benefits after
termination up to a certain maximum guaranteed amount;
defined contribution plans such as 401(k) plans are not
insured by the PBGC.
According
to PBGC’s Web site, your plan administrator must
notify you in writing sixty days before the plan ends. This
is called a “Notice of Intent to Terminate.” If
PBGC is terminating the plan, it notifies the plan administrator
and publishes a notice about the action in local and
national newspapers. In a standard termination,
generally by no later than six months after the plan’s
proposed termination date, the PBGC will send participants
a second notice, called a Notice of Plan Benefits, describing
the benefits they will receive. In a termination
initiated by PBGC, called a distress termination, PBGC
provides participants general information about its pension
insurance program and its guarantees. PBGC begins
communication with plan participants when it takes over
as a pension plan’s trustee. After it has
reviewed the plan’s records, assets, liabilities,
and employees’ participation in the plan, the PBGC
would be able to provide more specific information about
benefits. Employees should also consult their company’s
human resources department for more information about
pension plan changes or termination.
So
has the bell tolled for pensions? Maybe not yet,
but times are changing and the mold is being cast.
For
more information about pensions or retirement saving,
here are some Web sites:
U.S. Department
of Labor: www.dol.gov/ebsa/publications
