When was the last time you heard good news about pensions? Instead, you’ve probably seen alarming headlines such as these:
- “Their pensions are gone. Newark Archdiocese is to blame, lawsuit says”
- “Will Sears retirees see their pensions?”
- “GE’s $31 billion pension nightmare”
Are you worried about your pension or a parent’s pension? This article describes the laws that should keep your promised benefits safe, some limitations of those laws, and what you can do to protect yourself.
- Pension plans can become underfunded due to mismanagement, poor investment returns, employer bankruptcy, and other factors.
- Single-employer pension plans are in better shape than multiemployer plans for union members.
- Religious organizations may opt out of pension insurance, giving their employees less of a safety net.
Bad Situation No. 1: Your Pension Plan Is Underfunded
A major problem for traditional, defined-benefit pension plans today is underfunding. That is, do they have enough money to meet their projected future obligations? The problem is particularly acute with multiemployer pension plans, a type of pension plan primarily for union members who work for more than one company.
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) maintains a list of plans whose funding status it classifies as critical, critical and declining, or endangered. In 2020, 121 plans were in critical condition, 65 were critical and declining, and 61 were endangered. A critical plan is less than 65% funded, a critical and declining plan is expected to become insolvent within 15 years, and an endangered plan is less than 80% funded.
Examples from the 2020 list include the Lumber Industry Pension Plan (critical), the Automotive Industries Pension Plan (critical and declining), and the Bricklayers and Trowel Trades International Pension Fund (endangered).
Most multiemployer plans are not in trouble, but enough of them are that Congress included them in the huge American Rescue Plan Act of 2021, passed in March 2021. The new law will provide funds for the Pension Benefit Guaranty Corporation (PBGC) to assist plans that are in serious danger of insolvency. They will be eligible to apply for special assistance in the form of a single, lump-sum payment designed to cover the plan's obligations through the year 2051. Unlike traditional PBGC funding, which relies on insurance premiums, the new money will come from the government's general tax revenues.
This article describes the rules pertaining to defined-benefit plans, often referred to as traditional pensions. Defined-contribution plans, like a 401(k) or 403(b), operate differently and are not covered by the Pension Benefit Guaranty Corporation.
Laws that protect you
The Employee Retirement Income Security Act of 1974 (ERISA) provides protection for workers and retirees in traditional defined-benefit pension plans. It also created the Pension Benefit Guaranty Corporation (PBGC). Whether you are in a single-employer or multiemployer pension plan, if your plan participates in the PBGC program that agency guarantees your benefits up to certain maximums.
The PBGC currently covers some 23.5 million workers and retirees in about 23,200 single-employer plans and another 10.9 million workers and retirees in about 1,400 multiemployer plans.
Normally, the PBGC is funded by pension plan sponsors. “Companies with current defined-benefit pension plans pay an annual fixed-rate insurance premium into the PBGC on behalf of each participant,” explains Bradley S. Smith, a partner at investment consulting firm NEPC who heads the firm’s corporate practice group and consults for corporate defined-benefit plans.
“They also pay an additional variable-rate insurance premium if the plan is underfunded,” Smith continues. “The larger the underfunding, the larger the variable-rate premium, which is subject to an annual per-participant maximum.”
Multiemployer plans also pay an annual insurance premium to the PBGC. The premium is based on how many participants the plan covers.
The PBGC's guaranteed maximum coverage differs according to the type of plan and is subject to change.
For example, in 2021 a worker in a single-employer plan could receive a maximum of $6,034.09 a month at age 65 if they took their benefit in the form of a straight life annuity. If they instead elected to receive a joint and 50% survivor annuity, they'd receive a maximum of $5,430.68 a month.
Maximum multiemployer plan benefits are calculated with different formulas, but tend to be considerably less than those for single-employer plans.
Bad Situation No. 2: Your Employer Goes Bankrupt
Ironically, pension liabilities have helped destabilize some large companies and made their pensions more perilous. Sears, which declared bankruptcy in October 2018, is a well-known example. Its then-CEO said the $4.5 billion the company had contributed to its pension plans since 2005 made it harder for Sears to invest in operations and compete with other large retailers that didn’t have huge pension obligations, according to media reports at the time.
Laws that protect you
The laws that apply here are similar to the ones described in the last section. If your employer terminates its pension plan due to bankruptcy, the PBGC will step in if the plan is covered. It will then pay employees any pension benefits they’ve been promised that the employer can’t make good on, up to the guaranteed maximum amount.
A company’s pension finances are separate from its own finances. That means a company can be bankrupt but still have an adequately funded pension, or it can be doing great and have an underfunded pension. This separation also means that creditors can’t claim a bankrupt company’s pension assets.
Bad Situation No. 3: Your Pension Falls Into a Loophole
Pensions granted church status by the federal government can save money because they don’t have to pay into the PBGC’s pension insurance fund unless they choose to. However, if they don't, employees who participate in their pension plans won’t get the benefit of that insurance or be protected under ERISA.
Most church pension plans opt out of federal pension protections, according to the Pension Rights Center, a nonprofit consumer group. Church plans also don’t have to pay benefits equitably, fund pensions adequately, or even give employees information about their benefits or plan investments.
This exemption, which was intended to maintain the separation of church and state, applies to religious organizations of all denominations. It also applies to entities associated with these organizations, such as schools and hospitals.
Laws that protect you
If you work for a religious organization that has chosen not to be covered by federal pension law, state law applies. State laws “generally require that the trustees who run church plans must act wisely, carefully, and only in the interests of plan participants,” according to the Pension Rights Center.
If you believe you've been improperly denied the pension benefits your religious employer owes you, one option is to seek a jury trial in state court and try to win compensatory and punitive damages. There’s no guarantee you will win, of course. There’s also no guarantee that your employer will have the money to pay a judgment if you do win.
Besides filing a lawsuit, the Pension Rights Center recommends that workers in troubled church plans seek attention through traditional and social media and contact members of Congress to raise awareness and get help.
If you move, make sure your former employers know how to reach you.
4 Steps You Can Take to Protect Your Pension
Is your pension security a flickering flame that your employer can snuff out at any time? Maybe there’s something you can do to protect yourself before you smell smoke and require the protection of the PBGC.
There is, of course, the old three-legged stool. Plan for multiple sources of retirement income: Social Security, pensions, and personal savings. Still, a stool with only two legs is not one you can sit on comfortably. It’s unbalanced and shaky. And you shouldn’t give up easily on pursuing benefits to which you’re entitled. Tilt the odds in your favor by taking these steps.
1. Keep your information up to date
Smith, the pension consultant, says the first thing to do is make sure your contact information is accurate and up to date with any company that owes you pension benefits, especially if you no longer work there. It’s important that your former employer knows how to reach you.
It might be hard to believe, but the PBGC says more than 80,000 workers have unclaimed pensions worth more than $300 million. Workers can lose track of former employers that move, are bought out, or close down. The PBGC booklet "Finding a Lost Pension" can help you track down any money you’re owed.
2. Review and Save Your Records
"The next thing you should do is review the annual disclosures from your company and save a copy in your records," Smith says. "When you retire, review your records and make sure your salary and years of service numbers are accurate."
The Pension Rights Center recommends that workers keep their annual W-2 forms to prove their earnings history, their benefit statements from the plan, plan notices, and any other official documents, such as the Summary Plan Description. If your employer makes a mistake in your records or loses any records, you’ll have a backup to prove what you’re owed.
3. Get Help
Workers can also turn to PensionHelp America, part of the Pension Rights Center. This resource connects people with counseling services and legal assistance when they have questions about their pension or need help with benefits.
In addition, the federal government’s Employee Benefits Security Administration (EBSA) has benefits advisors who can get you up to speed on your rights, help you find a missing pension, and even intervene with a plan administrator on your behalf.
4. File a Complaint
If you think your pension has been mismanaged, you can file a complaint with EBSA. If your complaint is specific and indicates that your employer or former employer has violated pension laws, EBSA's enforcement unit should investigate. Even nonspecific complaints can lead to investigation when multiple sources report problems with the same entity, EBSA says.
The Bottom Line
A number of situations could put your pension at risk, including underfunding, mismanagement, bankruptcy, and legal exemptions. Laws exist to protect you in such circumstances, but some laws provide better protection than others.
Unfortunately, there’s no guarantee that you won’t find yourself among the unlucky employees who haven’t received and may never receive the pension benefits they’ve been promised. Nevertheless, you shouldn’t give up on money you’re owed without a fight. If you do need help, reach out to legislators, the news media, the legal system, and the government. There are people who want to help and have the experience to do so.