Bulletin
Investor Alert

FA Center Archives | Email alerts

March 4, 2021, 12:09 p.m. EST

Worried about your pension? Even if your employer goes bust, you’re not sunk

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

By Morey Stettner

If you’re among those rare employees with a pension, you may be relieved as you plan for retirement. But can you count on this payout?

About one in four U.S. civilian workers have access to a pension plan, according to the Bureau of Labor Statistics. But not all plans are created equal. Funding levels vary and red flags abound. Some pensions have underfunded employer contributions. Overly rosy assumptions about pension-fund investment returns make matters worse. And the COVID-19 pandemic’s impact might result in greater shortfalls and unfunded liabilities.

If you have a pension with an employer that’s struggling to survive — or has undergone a series of mergers and reorganizations which leave it a shell of what it once was — you may wonder if it’s better to start taking distributions as soon as you can.

Yet fears about your employer’s decline — or even a filing for Chapter 11 bankruptcy protection — need not cause panic. The company’s pension plan can remain intact amid ownership changes, massive layoffs and other upheavals. 

“A plan can be well funded even if the company is struggling,” said Dan Doonan, executive director of the National Institute on Retirement Security, a nonprofit group in Washington, D.C. “They are two different entities.”

Here’s more good news: There are safeguards in place in case your employer can no longer meet its obligations.

“There’s twofold protection,” said Colin Slabach, assistant professor of retirement at the American College of Financial Services in King of Prussia, Pa.

First, pension benefits typically fall under the Employee Retirement Income Security Act (ERISA) that provides protection against creditors. The law sets rules that require plan sponsors to provide adequate funding, so the cash to pay future pensions is in a kind of lockbox.

Second, if the company cannot fulfill its promise to pay pension benefits, the Pension Benefit Guaranty Corporation (PBGC), a federally chartered organization, will step in and pay a portion of the promised amount.

“The PBGC is essentially insurance,” Slabach said. “Most people will receive a reduced benefit if PBGC takes over, but it’s still a nice means of protection.”

When financial advisers confer with clients, they can explore to what extent a pension is fully funded. From there, a big decision often involves whether to take a lump-sum distribution or annuitize (which usually means getting monthly payments for life).

A separate question can also arise: Should you take distributions sooner at a lower payout or wait a few years to get bigger payouts?

Even if you’re assured that the money (or at least some of it) will be there if you wait, there are other considerations. For example, it can get complicated for married retirees who, upon their death, want their widowed spouse or child to continue receiving pension benefits. Advisers can help clients understand their plan’s survivor benefits.

As you near retirement age, review your employment history. Jog your memory to determine if you participated in a pension from an old employer — perhaps a place you worked in your 20s or 30s.

The Pension Protection Act of 2006 requires that employers send plan participants an annual funding notice. But the plan administrator needs your current mailing address to do so; otherwise, you may have no idea that you’re entitled to a pension unless you dig through human-resources paperwork from prior employers to find out.

“It’s amazing the amount of [unclaimed pension] money that’s sitting there,” Slabach said. “People can completely forget” that an employer from the distant past offered a pension.

More: These are the people who benefit most from required minimum distributions

Plus: Chuck Reed warned of city services ‘insolvency’ after the Great Recession. He thinks the corona-crisis may be worse.

This Story has 0 Comments
Be the first to comment
More News In
Personal Finance

Story Conversation

Commenting FAQs »

Rates »

Partner Center

Link to MarketWatch's Slice.