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Plan Well, Retire Well

Saving and investing your money

Pension Plans At Risk: Employer Bankruptcies, Frozen Plans, Suspended Matching


Earlier this year, my husband's employer notified him that it was freezing his pension plan. By law, he will retain all the benefits he had earned up to that point, but his pension benefit is "frozen" at that level and will not increase. Additional years of service or pay increases will have no impact. At the same time, they suspended company matching contributions to his 401(k). None of this is good news. But what actions should we take to mitigate the impact?

Revise Retirement Income Projections

We should revise our expectations for retirement income by re-calculating any projections we've done. I've always been conservative with projections where our pension income was concerned. I've either used just the benefit that we've already earned, or only assumed another year or two or service credit. So the numbers I ran in the past may still be valid.

But many people base their projections on the benefit they'll earn if they continue to work for their current employer until retirement age. Those projections show a lot more pension income than you're likely to actually receive. For those rose-colored projections to come true, several things have to happen:

  • Your employer has to stay in business. Even if it's bought out by another company, your benefits could change.
  • You have to remain employed there until you choose to retire. With the frequency of layoffs over the past 10 years, I'm not sure what the odds are for that. In today's economy, middle and upper level employees are just as at risk of layoff as lower-wage earners.
  • Your employer has to continue the pension plan.
    • They are under no obligation to continue the pension plan, and funding pensions is a big financial commitment for companies. If the organization is having financial problems, freezing a pension could be a logical choice. This is especially true if other employers who hire people with similar skills aren't offering a pension, or when unemployement is high - as it is now. One of the main reasons companies offer good benfits is to retain employees. Today, retention is not the main problem companies face. It's turning a profit.

Check Your Insured Benefit Amount

One thing you probably don't have to worry about -even if your employer files bankruptcy - is getting the pension benefits you've earned so far. Non-government employers pay into the Pension Benefit Guarantee Corporation to insure those benefits. In the event the employer goes bankrupt and they have not set aside sufficient funds to cover their pension obligations, the PBGC will cover the payments. There are limits; if you're a highly paid employee, your pension might exceed the insured amounts. But the PBGC says, "Most people receive the full benefit they had earned before the plan terminated."

Here's a quick run-down of the maximum insured benefits for selected ages for plans that end in 2009:

Age

Annual Maximum

Monthly Maximum

Monthly Joint and 50% Survivor Maximum*

66

$ 59,400.00

$ 4,950.00

$ 4,455.00

65

$ 54,000.00

$ 4,500.00

$ 4,050.00

64

$ 50,220.00

$ 4,185.00

$ 3,766.50

63

$ 46,440.00

$ 3,870.00

$ 3,483.00

62

$ 42,660.00

$ 3,555.00

$ 3,199.50

61

$ 38,880.00

$ 3,240.00

$ 2,916.00

60

$ 35,100.00

$ 2,925.00

$ 2,632.50

59

$ 32,940.00

$ 2,745.00

$ 2,470.50

58

$ 30,780.00

$ 2,565.00

$ 2,308.50

57

$ 28,620.00

$ 2,385.00

$ 2,146.50

56

$ 26,460.00

$ 2,205.00

$ 1,984.50

55

$ 24,300.00

$ 2,025.00

$ 1,822.50

*Both spouses the same age.

For more details about PBGC insured limits, see their news release.

There is no insurance for your 401(k), 403(b), 457, or other defined contribution plan; it's up to you to manage those investments wisely.

Increase YOUR Contributions

To make up for losing future employer contributions toward your retirement, you probably need to increase the amount of your personal savings and contributions each year toward retirement. Some options for doing that are to start or increase contributions to:

  • Your employer "defined contribution plan" such as a 401(k) or 403(b),
  • Your own IRA.
  • A spousal IRA for a nonworking spouse
  • A SEP, SIMPLE, or Keogh plan if you have any income from self-emloyment
  • Non-tax advantaged savings accounts. If you use a "buy and hold" strategy in these regular accounts, you effectively get tax deferral on the growth in the investment until you sell it. Index mutual funds are good candidates for this.

If you no longer have any employer retirement plan, not even one to which you can contribute from your paycheck, you might have an option that was denied you in the past: deductible contributions to an IRA. "Active participants" in employer plans whose income is over certain limits cannot make deductible contributions to traditional IRAs. If you have not had any contributions to employer plan at any time during the year, you are no longer an active participant and you can deduct your IRA contribution regardless of your income. For 2009, those limits for adjusted gross income are:

  • Single filers $55,000 -$65,000.
  • Married filing jointly $89,000-109,000.
  • Married filing separately $0 to $10,000.

See IRA Basics for more information about traditional and Roth IRAs.

I'll save the issue of whether you should consider an annuity to fill the gap left by a frozen pension for a future post. So stay tuned.

To send questions or comments about this post, click on my name below.



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