Is Your Retirement Money at Risk?
Since May 10, 2005, when a bankruptcy judge let United Airlines default on its pension plan, employees at all types of companies have started to wonder whether their retirement money is safe. The good news: It probably is.
Retirement Plans Explained
The United case applies to traditional defined-benefit pension plans, which guarantee workers a defined monthly income after they retire. When employers like United run into financial troubles and can no longer afford to pay benefits, the Pension Benefit Guaranty Corp. (PBGC), a government agency, generally takes over to guarantee payments continue.
Most workers at those companies that have defaulted on pension plans end up getting their full pension payouts from the PBGC. For plans taken over in 2005, the PBGC will pay up to $45,614 this year to people who retire at 65 (the maximum is lower for early retirees). If the annual pension payout is less than that, the recipient still receives the full amount he's been expecting from his pension. The average pension payout is currently just $14,000, according to the Employee Benefit Research Institute (EBRI).
And many people don't need to worry about traditional pensions anyway. Instead, more employers now offer defined-contribution (not defined-benefit) retirement plans, such as 401ks. These types of plans let you contribute pretax money, which your employer may match. You won't owe taxes until you withdraw the funds when you're retired. You're responsible for your investment choices and for any gains or losses; your employer is off the hook, even if the account loses money. In 1991, 26.1 million people were covered by defined-benefit plans, while 30.4 million had defined-contribution plans. By 2003, only 21.4 million had defined-benefit plans, while 52.1 million had defined-contribution plans, according to EBRI.
People with defined-contribution plans need not worry about their employer's financial health when it comes to their retirement nest egg. Money in 401ks and other similar plans is held in trust for you, and it's illegal for your employer to touch it.
Protect Your Financial Future
But even if the odds are good that your retirement money is safe, this is a perfect opportunity to review your savings plans and make sure you aren't counting on money that may never appear. Here are some simple steps to take:
- Find out whether any of your pension money is at risk, especially if you work in the troubled auto, airline or steel industries, recommends Ken Robinson, a certified financial planner with The Monitor Group in McLean, Virginia. Several of his clients are retired pilots with United and other airlines, and he's helping them figure out whether they'd lose money if the PBGC took over their company's plan. "In a situation like that, it's very difficult, because you've been planning all along for a certain benefit," he says. In that case, clients need to set aside more money in their own retirement accounts to help fill any gaps.
- When planning for retirement, don't count on money you aren't guaranteed to have. Employers generally send an annual statement showing how much of a pension payout you'd receive in retirement if you left your job today and if you continued with the company until you're 65. Reed Fraasa, a certified financial planner in Paramus, New Jersey, recommends focusing primarily on that first column -– the money you'd get if you left right now. After all, you could be laid off or decide to switch to another job, or your employer could freeze its pension plan and stop the accrual of new benefits. "We don't use the projected benefit; that's a wishing well out there," Fraasa says. "We focus on the part you do own."
- Protect yourself. Even if you're in line to get a huge pension, it also helps to save as much as possible in accounts you control. Invest the maximum in your 401k, especially if you have an employer match, and in your Roth or traditional IRA (on both, the limit is $5,000 in 2009; $6,000 if you're 50 or older). If you can afford to save even more, open a small-business retirement plan if you have any self-employed income, or invest in a taxable account you plan to hold on to long-term.