Will Your Pension Plan be There When You’re Ready to Retire?

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Most people today acknowledge the change in retirement options. The days of the company sponsored pension plan began disappearing thirty years ago with the change in economics and demographics.

It’s no longer a longevity issue alone for current and future retirees as Congress weighs more requests to alter the pension landscape. According to a recent newsletter from National Retiree Legislative Network (NRLN), a provision in H. R. 83, signed into law by the President in December 2014, sets in motion new ways for plan sponsor to de-risk or remove pension obligations promised to workers and retirees.

We’re all familiar with stories of financially weak companies allowing plans to fall below a 90% funding level needed for solvency of the plan. This underfunding leads to freezing of benefits or conversions from defined benefit to defined contributions and shifting the onus to the plan participant—the employee. If insolvency of the sponsoring company is realized and bankruptcy ensues the plan may be terminated and then the Pension Benefit Guaranty Corporation (PBGC) assumes the risk.

De-risking of plans has been accomplished over the last several years in three significant ways. One way is for the plan itself to alter the mix of the investment portfolio by reducing equity holdings and substituting fixed income, or theoretically lower risk securities. This may be done as a way to prevent a ratings drop in the company’s bond rating, which in turn could lower stock values. Lower stock prices could then affect executive bonuses. Can’t have that now, can we?

Another way to reduce plan liabilities is to remove participants and that is done with Lump Sum Pension Buyout offers. The net effect of that is to transfer the risk to the employee and off the books of the pension plan. Why did you think the plan sponsor was making the offer? Lump sum offers may leave the plan less funded for those who didn’t, or couldn’t, take the offer. This may also affect surviving spouses as well. That is one reason why the spouse must sign off on the paperwork to complete a lump sum distribution.

The plan may also choose to purchase an annuity to assist with the de-risking of the plan. Once issued the annuity becomes a liability for the issuing insurance company. This would remove the plan from PBGC protection as well.

Lastly, H.R. 83 contains an amendment to ERISA rules and opens up a potentially dangerous precedent to allow for reductions in benefits to existing retirees where plans are underfunded. Have you seen the stories emanating from Detroit and Chicago regarding this very issue?

Don’t fall into the trap of asking coworkers for their advice. That may not be the best option for your specific situation. I suggest you review what’s going on with an advisor now so you are prepared to protect your retirement assets and income in case you are contacted by your pension plan administrator.

There are usually tight deadlines to respond to their communications. Being prepared with what options to choose once you do receive a letter will help make the process less stressful.

Feel free to give me a call if you have any questions or would like to begin planning now for what may happen with your plan at some point in the future.