Consider yourself lucky if you're among the relative few working at companies that still offer "defined benefit" pension plans, coveted relics that provide a generous and reliable income throughout retirement. But even if you've got one, you can't take for granted anymore that you'll get all of the money your plan has promised. These days, more and more pensions are unable to meet their obligations and end up being terminated. Here are the top seven signs that your pension might be in jeopardy. (For background reading, see The Defined-Benefit Pension Plan's Many Problems.)
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1. Your employer has money troubles.
A company with severe financial issues like heavy debt, bad credit and difficulty paying bills, meeting payroll or making pension plan contributions has little choice but to cut costs to survive. Pensions are apt to get the ax in such cases because they can be a huge expense for employers.
2. Your employer goes bankrupt.
If your employer has filed for bankruptcy, this is never a good sign for your pension plan. Bankrupt companies are much more likely to terminate a pension plan; if they file under Chapter 7 they will be forced to do so, because the company will be liquidated to pay creditors and will therefore cease to exist.
3. Your pension is too "rich."
A pension may be considered too rich not because the plan is overfunded but because it pays an unusually generous benefit each year, like 50% of the salary a participant was making right before retirement. Since salaries tend to be highest at that point, such a plan can get extremely expensive and become a target for cost cutting.
4. There's talk about a "defined contribution" plan.
401(k)s and other defined contribution plans where employees contribute most of the money have become the norm largely because they're cheaper for employers. Companies commonly replace traditional defined benefit pensions with defined contribution plans to reduce costs.
5. Your company is sold.
If your company is sold to another company, the acquiring company could decide not to take on sponsorship of your company's pension plan. That would be spelled out in documents describing the terms of the sale. (Learn more about the mergers and acquisitions process in What Makes M&A Deals Work?)
6. Your company sends you a "participant notice."
A participant notice is a report you are required by law to get if your pension plan has been underfunded by a certain percentage within a specified time period, such as by more than 20% during the past year. A participant notice could be a sign your company is having financial trouble significant enough to consider terminating your pension plan. (To learn more about how to determine where your pension plan stands, see Analyzing Pension Risk.)
7. There are complaints about the plan.
Be suspicious if you consistently hear negative reports like current retirees getting their checks late or in the wrong amount, or if an auditor raises concerns about the plan's solvency. Either could be signs your pension is - or will be - on the rocks.
It Isn't All Bad
Now some good news: a pension plan termination isn't necessarily a complete disaster. With a termination, things can go a couple different ways. Your company could continue to oversee the plan but the amount you'll get in retirement is "frozen" - it will no longer grow over time.
Alternatively, an independent government agency called the Pension Benefit Guaranty Corporation (PBGC) might take control of the plan, which usually occurs when a bankrupt company is liquidated out of existence. Either way, you'll likely get a smaller pension than you might have been counting on. The sooner you know the fate of your pension plan, the better able you'll be to make adjustments such as saving more on your own and re-evaluating spending plans for your golden years.