When was the last time you heard good news about pensions? Instead, you’ve probably seen alarming headlines such as these:
Private sector pension popularity has declined over the last four decades. Today’s workers are unlikely to be offered a pension plan unless they work in the public sector. And those already drawing on their pensions or grandfathered into discontinued plans have legitimate reasons to wonder whether they will receive all the pension income they’ve been promised.
Are you worried about your pension or your parent’s pension? Learn about the laws that should keep your promised benefits intact, 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 better protected than multiemployer plans by available pension insurance.
- Religious organizations may opt out of pension insurance, and their employees have less of a pension safety net than many other private-sector workers do.
Bad Situation No. 1: Your Pension Plan Is Underfunded
The U.S. Department of Labor’s Employee Benefits Security Administration maintains a list of private-sector pensions whose funding status is critical, critical and declining, or endangered. In July 2019, 129 are critical, 73 are critical and declining, and 80 are 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.
Overall, the pensions of labor union members and trade professionals, also known as multiemployer plans, are at greatest risk. Examples include the Automotive Industries Pension Plan (critical and declining), the Lumber Industry Pension Plan (critical), and the Cement Masons Local Union 526 Pension Plan (endangered). Most multiemployer plans are not in trouble, but a good number are.
The federal government’s Pension Benefit Guaranty Corporation (PBGC) is the main bulwark safeguarding the pensions of American workers, but its protection has limits.
Laws That Protect You
The Employee Retirement Income Security Act of 1974 (ERISA) protects traditional defined-benefit pension plans. This act created the Pension Benefit Guaranty Corporation (PBGC). Whether you participate in a single-employer or multiemployer pension plan, the federal government protects your basic benefits. The PBGC covers nearly 26,000 single-employer and multiemployer pension plans, and fewer than 300 are underfunded. The single-employer system covers 28 million employees in 22,000 plans. The multiemployer system covers about 10 million employees in 1,400 plans.
“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 pension 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.
Participants’ pensions are protected up to a guaranteed maximum that is different based on whether they’re in a single-employer or multiemployer plan. The multiemployer limit is no more than $17,160 per year for an employee with 40 years of service. The single-employer guaranteed maximum is generally much higher. It is based on your age when you first start receiving benefits. Special rules apply if your plan fails during your employer’s bankruptcy.
Bad Situation No. 2: Your Employer Goes Bankrupt
Ironically, pension liabilities have helped to destabilize large companies and made their pensions more perilous. Sears is a well-known example. Its CEO, Edward Lampert, wrote a widely quoted blog post in September 2018 saying that the $4.5 billion the company contributed to its pension plans since 2005 had made it harder for Sears to invest in operations and compete with other large retailers that don’t have huge pension obligations. Sears declared bankruptcy in October 2018.
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 because it can’t fund the plan due to bankruptcy, the PBGC will 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 to which the federal government has granted church status can save money because they don’t have to pay into the PBGC’s pension insurance fund. However, employees who participate in these pensions don’t get the benefit of that insurance and aren’t protected under ERISA.
Most church pension plans opt out of federal pension protections, according to the Pension Rights Center, a nonprofit consumer watchdog group. Church plans also don’t have to pay benefits fairly, fund pensions adequately, or give employees information about their benefits or plan investments.
This exemption to maintain separation of church and state doesn’t just apply to Christian churches; it applies to religious organizations of all denominations. It also applies to organizations associated with these organizations, such as schools and hospitals. It’s why there’s an employee lawsuit against the Newark Archdiocese by St. James Hospital employees. It’s why SSM Health had to pay workers $60 million in a class action lawsuit.
Laws That Protect You
If the religious organization for which you work 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 are 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. Justice does not always prevail. 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.
The amount of the deficit in the PBGC’s multiemployer program as of fiscal year 2018.
Is the PBGC in Jeopardy?
Clearly, the PBGC is instrumental in pension protection. Unfortunately, it currently has a shaky financial status. Its single-employer program had a $2.4 billion surplus at the end of fiscal year 2018, but its multiemployer program had a $53.9 billion deficit. The multiemployer program is projected to become insolvent in fiscal year 2025.
It’s difficult to predict what the PBGC’s financial status will look like in the future. How will plan investments perform? How many additional plans will fail? How much will the PBGC owe pensioners for those plan failures? A government bailout of the PBGC is possible but not guaranteed.
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 Accurate
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 to make sure 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 $400 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 the 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 W-2 forms to prove their earnings history, your benefit statements from the plan, plan notices, and official plan 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 has benefit advisors who can get you up to speed on your rights, help you find a missing plan, and even intervene with a pension administrator on your behalf.
4. File a Complaint
If you think your pension has been mismanaged, you can file a complaint with the Employee Benefits Security Administration, which oversees retirement plans. It’s a division of the U.S. Department of Labor. If your complaint is specific and indicates that your employer or former employer has violated a pension law, the EBSA's enforcement unit should investigate. Even nonspecific complaints can lead to investigation when multiple sources report problems with the same entity.
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.