Can you rely on your pension plan?

A generation or so ago, if you worked for a medium- or large-sized company, you probably got a pension, which you could count on to provide steady, predictable payments throughout your retirement. But things have changed. Today, far fewer businesses even offer pensions and many are on shaky ground. The same is true for some state and local government pension plans, as well, although a national study singled out the Wisconsin retirement fund as the strongest in the nation. According to a 2010 study conducted by the Pew Center for the National Association of State Retirement Administrators, Wisconsin leads the country in funding of public pension liabilities.

If you’re covered by a pension, either through the government or through your company, you should take the time to understand what changes may be happening. Over the last decade, many pensions, both private (through businesses) and public (through government), became underfunded. The problems either started or were made worse by the Great Recession of 2008–09, which was accompanied by a sharp drop in the stock market. Since then, the market has more than regained all its losses, but many pensions still haven’t recovered. Private pensions also face potential threats when companies merge or are taken over by other firms.

While private and public pension funds may share some similarities when it comes to landing in trouble, they diverge in their options for getting out of it. For example, if a private pension plan is in jeopardy, it can take actions that may not work out in your favor. Instead of building its assets, an underfunded plan can change its benefit formula so that your eventual payout will be reduced. A company can also “freeze” its plan to stop further accruals, or even terminate the plan.

On the other hand, a public pension plan is greatly constrained in what it can do to relieve financial stress. Most states, including Wisconsin, offer pension protection either through their state constitutions or through a court’s interpretation of the constitution.

Although a private pension does not offer the safeguards of a public plan, it doesn’t mean you’re defenseless if your plan is in danger. Actually, your pension carries with it some powerful protection, especially if you are “vested” in your plan. Vesting is the rate at which benefits are fully owned by you. Vesting schedules vary by retirement plan, so, for instance, you might have to put in five years before becoming fully vested. As long as you’re vested in the plan, it must pay you a benefit at some point, even if your company is sold and even if the buyer is based overseas.

Also, if your plan is terminated without sufficient money to pay all benefits, the Pension Benefit Guaranty Corp. (PBGC), a federal agency, can help you out — to a degree. The PBGC is only required to pay vested benefits up to a certain amount, which varies by an employee’s age and the year in which the plan is terminated. However, this protection may become shakier in the years ahead, as the PBGC itself is significantly underfunded. The PBGC insures pension plans that businesses sponsor but does not insure state or local government plans.

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If you have doubts about your company’s pension plan, what can you do? It’s important to review your pension summary plan description and annual benefit and funding notices, which your employer should make available to you. It’s generally a positive sign if your plan’s assets are at least 80% of liabilities.

You can also be proactive about your pension if you’ve already left your company. For starters, upon your departure, get a letter stating that you’re vested in the pension plan and always keep your pension documents in a safe, accessible location. If you learn that your former company has been sold, or will be sold, reach out to the company to find out what will happen with the pension plan.

Also, be sure to look beyond your pension plan for retirement income. If your employer offers a retirement plan outside your pension — such as a 401(k) for companies, a 403(b) for nonprofits, or a 457(b) for state and local government employees — try to contribute as much as you can afford. At a minimum, put in enough to earn your employer’s matching contribution, if one is offered. Whenever your salary goes up, boost the amount you invest in your retirement plan. A financial professional can help you decide how to allocate your money among the various options in your retirement plan based on your goals, risk tolerance, and time horizon.

You will work many years to earn your pension, so you deserve to get as much out of it as you can. While you can’t control how your pension is managed, you can certainly stay aware of your plan’s status, health, and of the protections due to you, and you can build as many financial resources as possible outside your plan. By taking these steps you can help improve your prospects for enjoying a comfortable retirement.

Provided by RBC Wealth Management and Lauri Binius Droster, CFP^©, Branch Director, Senior Vice President, Madison Office, 10 East Doty St.

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