Traditional pension plans have been in the news a lot lately. A survey released last week by consulting firm Wyatt Watson found that only 37% of large pensions are fully funded, i.e., have enough money to cover their future obligations. That's a steep drop from 84% in 1998.
Ford (NYSE:F), General Motors (NYSE:GM), Wachovia (NYSE:WB), 3M (NYSE:MMM), Coca-Cola (NYSE:KO), and IBM (NYSE:IBM) are just some of the companies to announce they will have to devote millions of dollars (and in some cases, billions) to propping up their pension plans.
This past week, the pension plan covering pilots for US Airways was taken over by the Pension Benefit Guaranty Corporation (PBGC), the government-sponsored insurance program that assumes control of failed corporate defined-benefit plans.
The PBGC just keeps getting busier. In 2002, it took control of a record 144 pensions, almost 50% more than in 2001, putting the total number of plans being administered at well over 3,000. Last year, the PBGC had exhausted a $7.7 billion surplus, and ended with a deficit of $3.6 billion.
On top of all that, the General Accounting Office yesterday issued a report that "found significant problems" with the way the PBGC develops its budget estimates, and a senator accused the PBGC of incurring "inappropriate administrative operating expenses."
So, given all this doom and gloom, can you count on your pension in retirement? Now is the time to find out.
Pension basics
Employers who offer defined-benefit plans contribute a portion of each employee's paycheck to the pension fund. Professional institutional investors usually manage that money on behalf of the fund, though many pensions handle the investing duties in-house.
How much an employee will receive in retirement depends on the person's salary history, number of years of service, and the plan's formula. For example, the plan might stipulate that for each year an employee has worked for the company, he will receive 1.5% of the average of the final three years' salaries. For example, if the person earned $28,000, $30,000, and $32,000 for the three years before he retired, and he worked for the employer for 10 years, then he could expect $4,500 a year in retirement. He would receive it till his dying day, and in most cases, the amount will not be adjusted for inflation.
Generally, only full-time employees are eligible for the pension plan, and only after they have "vested" in the plan (that is, spent three to seven years with the company, depending on plan rules). If an employee leaves before becoming vested, she cannot take her defined-benefit money with her.
Learn about your plan
Your resident human resources guru is the first person to ask about your defined-benefit plan. She can provide information about the vesting schedule and contact information for the plan administrator.
One of the first documents to review is the "summary plan description," which you should have received when you became eligible for the plan. That will contain all kinds of tidbits about how the plan operates, how benefits are calculated, and how you can get your grubby little hands on the money.
Also, each plan must file Form 5500 (or 5500-C/R for smaller companies) with the Department of Labor each year and issue an annual report. Though reading these documents sounds about as fun as playing strip solitaire, it will at least give you an idea of the health of your pension plan.
While you're on the horn with your administrator, trying to probe the plan's health status, request an estimate of the actual benefit you'll receive in retirement.
Is your plan underfunded?
Determining whether a pension has enough money requires many assumptions, such as future rates of return, future benefits, future number of employees, and who will win the Super Bowl. So, to some extent, it's no more than a rough guess.
If you work for a publicly traded company, you probably already know if your pension is underfunded, since many of these companies have announced the health status of their pensions. It should also be mentioned in the company's annual report. Otherwise, ask the pension administrator directly.
It's not the end of the world if your pension is underfunded. As long as your company is fundamentally strong, the difference should be made up eventually, through company contributions and/or a healthy rebound in the stock market.
What's most important is the overall financial health of the company offering the plan. If the company goes bankrupt and the plan is covered by the PBGC, then the plan is insured. However, that's no guarantee that beneficiaries will receive the same amount they would have had otherwise, and more benefits can't be accumulated. (Not all plans are covered by the PBGC, so find out if yours is. Also, pensions offered by government entities don't need the PBGC, since their authority to raise taxes backs their plans.)
For more on monitoring your pension plan, read the Department of Labor's What You Should Know About Your Pension Rights.
Is your retirement underfunded?
Now that you know how much you can expect from your pension, take some time to Fool around with our online calculators, or consider our How to Plan Your Perfect Retirement guide.
Don't rely just on a pension and Social Security to get you through your golden years. Accumulate some savings on your own, through a 401(k) or IRA. You still have until April 15 to fund your IRA for 2002, which will allow you to make an additional contribution in 2003.
For his five years of teaching sixth graders, Robert Brokamp will receive $108 a month, 32 years from now. And no, that won't be adjusted for inflation. Which is why he's still working, co-writing The Motley Fool Personal Finance Workbook and writing The Motley Fool's Guide to Paying for School . The Motley Fool is investors writing for investors.
