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COPYRIGHT 2002 Consumers Union of the United States, Inc.
Employees have seen once-lush 401(k) retirement accounts--already whipped by two years of stock-market losses--shrink even more in the summer's market slide.
But some 44 million workers have another asset: a defined-benefit pension plan. In contrast to the 401(k), which requires employees to take their chances with stock and bond markets, the defined-benefit plan is the sole responsibility of the employer. It promises to make a specific monthly payment--or a lump sum--at retirement based on the employee's salary and years of service. The employer (or a group of employers, in some cases) contributes to the plan on behalf of all qualified employees and then invests the funds. If the returns are insufficient to pay participants what they would be due, the employer must make up the difference under rules set by the 1974 Employee Retirement Income Security Act (ERISA).And if the employer goes under or can't continue the plan, the Pension Benefit Guaranty Corp. (PBGC), an employer-funded government insurance program, will step in and pay beneficiaries instead. A defined-benefit plan is as close to a sure thing as you can get.
In the past two years, however, pension plans, like other investments, have suffered tremendous losses in the market. As a result, in 2001, many plans, including those from some of the nation's biggest companies--General Motors, Exxon/ Mobil, and AMR--were seriously underfunded. And with many investments continuing to yield much lower returns than they did in years past, 2002 threatens to be worse. "We're reaching a point where plan participants have reason to be concerned," says Adrien LaBombarde, principal of Milliman USA, a large pension consulting firm in Houston.
Indeed, while it's true that the PBGC provides employees a safety net, it has some gaps. For starters, it does not cover participants in pension plans with fewer than 26 participants. Furthermore, there are limits to what the government will pay if your plan goes bust. (See the table on page 12.) Payments can be generous for participants in so-called single-employer plans run by one company. But for multi-employer plans, usually the result of collective bargaining agreements, payments are much lower. Nonetheless, participants in single-employer plans who earn more than around $115,000 a year might not get everything they were promised under a typical pension formula because their benefit would top the PBGC limit.
What's more, should the business climate deteriorate, some corporations may go bankrupt or come under intense pressure to terminate their plans. Such an eventuality can affect those already...
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