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 a background reading, see Pension Plans: Pain Or Pleasure?)
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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 axe in such cases because they can be a huge expense for employers.
2. Your employer goes bankrupt.
That's obviously never a good sign. Bankrupt companies are much more likely to terminate a pension plan and they will for sure if they file under Chapter 7, meaning the company will be liquidated to pay creditors and 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 you 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.
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5. Your company is sold.
If that happens, the company that buys you out could decide not to take on sponsorship of your old company's pension plan. That would be spelled out in documents describing the terms of the sale.
6. Your company sends you a "participant notice."
This 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.
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.
Or, 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. But the sooner you know, 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. (To learn more, check out Analyzing Pension Risk.)
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