HomeIn the wake of poor market performance over the past few years, a number of traditional pension plans sponsored by private employers do not have sufficient assets to provide the promised benefits. These plans are underfunded.
In general, if your plan is a traditional pension plan, it promises to pay you a specified monthly benefit in retirement. Your plan may specify a flat dollar amount, such as $100 a month. Or, more commonly, it may specify a benefit formula, which takes into consideration other factors such as your age and your length of service. For example, your plan may provide for a benefit equal to 10% of your average salary, based on your three highest wage earnings years with your employer, for every year of service with your employer.
With a traditional pension plan, your employer is responsible for making all contributions to the plan. Each year, your employer must hire an actuary to calculate, based on interest rate and other assumptions, the amount that must be deposited into the plan so that the plan will be able to provide the promised retirement benefit.
So, how will you know if your pension plan is underfunded? If you want to check the status of your pension plan, simply ask your Plan Administrator to tell you what your plan's funded percentage is. In fact, you may want to inquire even if you are not concerned about your plan.
What happens if your plan is underfunded? Don't panic. Even if your plan is underfunded, it may not be in trouble. Many pension plans become underfunded for one reason or another. It doesn't necessarily mean your employer will not be able to cure the plan. Most plans recover quite nicely within a couple years. And, for those plans that continue to have trouble, help may be available from the Pension Benefit Guarantee Corporation (the 'PBGC').
The PBGC is a federal agency that protects and insures pension benefits in private sector pension plans. When a plan has insufficient assets to pay all promised benefits and the employer is not able to cure the plan, the PBGC will step in to pay the promised benefit, up to certain limits set by law. When this happens, it is likely that some employees will not receive the entire benefit promised under the plan. The Summary Plan Description, provided by your Plan Administrator, will tell you if your plan is covered by the PBGC.
What should you do if you find your plan is in trouble? Unfortunately, your options are limited with regard to the plan. However, you are able to reexamine how you save for retirement. For example, you may need to add a column or two of additional support by increasing your salary deferral contributions to your 401(k), if any, and your IRA or annuity.
It is always wise to stay informed, especially about one of the resources supporting your retirement plan. Your inquiry may uncover a need to modify how you save for retirement by adding another 'column of support.'
One of the most important steps you can take now is to become informed: informed about your pension plan and informed about other options. You will want to consult with your Financial Advisor as a part of your information gathering process and to review any additional proactive steps you may want to take.