Keeping Tabs on Your Pension Plan
If you are one of the approximately 40 million individuals covered by a traditional defined-benefit pension plan, it pays to check up on your plan periodically because:
You may catch an error, such as the use of an incorrect salary amount, made by the plan administrator. Errors that are caught earlier are easier to fix.
You will know what the plan is promising to pay you on retirement, and what you can expect if you retire early.
You may be receiving less than your pension plan promised you. Companies have cut or even eliminated benefits, and under-funded plans of companies that get into financial trouble are usually unable to pay up.
If you ask the right questions about your plan, you will have a clearer picture of whether you can count on the pension benefits—whether your plan will actually live up to its promises and pay you what you are expecting at retirement.
Ask your pension administrator or employee benefits manager the following questions:
When will I be vested? You don’t have any real claim on money that’s in your account in the pension plan until it vests. Your company will have one of two types of vesting schedules: (1) you become 100% vested after five years at work, or (2) you become 20% vested after three years and continue to vest in stages until you reach 100% vesting in the seventh year.
NOTE: By law, your company must provide you with a summary plan description booklet, which describes the vesting schedule.
How much will I get? Ask the pension administrator to calculate the current value of your accrued pension every year.
How much will I get if I retire early? As long as you have ten years of service, most plans allow you to get some pension benefits if you retire at age 55. The pension will probably be about half of what it would be if you retired at age 62 (considered “full retirement age” in most plans). The benefit amount is larger still if you retire at age 65.
Is the plan underfunded? About 20% of the private pension plans are considered underfunded by the Pension Benefit Guarantee Corporation (the federal government agency that insures pension plans). “Underfunded,” in real terms, means that if the company goes bankrupt, the plan could not fulfill its promises to pay benefits. You can get some idea of whether your plan is underfunded from the Summary Annual Report that plans send out either yearly or every three years, depending on the plan’s size. Check whether the plan has lost a large sum recently, and whether an explanation is provided for the loss. Also, check whether administrative costs are greater than 3% of plan assets, which may be a sign of poor management.
Is my plan insured by the PBGC? To obtain coverage of the pension plan, the employer must pay a yearly premium. The PBGC pays benefits to employees covered by plans that have failed. Benefits paid by the PBGC are subject to a ceiling.
In conclusion, careful scrutiny of this important retirement benefit is an important part of retirement planning. Also, whether or not you feel you can count on receiving a pension benefit at retirement, it pays to sock more money away for your retirement. It’s better to have an overfunded retirement than an underfunded one.
Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.