ALSO
- Leckey's Q&A
Successful Investing
Traditional
Pension Plans
Looking Good Again
by Andrew Leckey
Doing
it yourself doesn't always get it done.
While self-directed
401(k) retirement plans have gained in popularity over the past
decade, 44 million Americans still participate in traditional
defined-benefit pension plans with guaranteed benefits. Three-hundred
forty-six of the Standard & Poor's 500 companies offer them.
In fact, the swoon
in the value of 401(k) plans due to the weak stock market has
ignited a comeback for good-old-fashioned pension funds. While
workers can usually stash their 401(k) dollars in stable money
markets or fixed-income choices, many are disappointed and want
out.
Turning back the clock
will be easier said than done, however, due to earnings disappointments,
cost cutting and layoffs. Companies are exhibiting no desire
to revert to the past. Under-funding of defined-benefit pension
plans has also become a huge issue. Another concern is that,
unlike 401(k) plans, not all defined-benefit plans offer the
option of portability, in which a lump sum can be rolled into
an individual retirement account when you leave a company.
Despite those formidable
stumbling blocks, union negotiators, pension advocates and legislators
have begun shying away from do-it-yourself investing for 100
percent of one's retirement pot. They're advocating defined-benefit
pensions because a stock-heavy 401(k) can be a bear-market nightmare.
"In the wake of
the Enron disaster, more people are looking at traditional defined
benefit plans again, so much that we're examining ways to expand
the pension coverage of lower wage earners," said Karen
Friedman, director of policy strategies for the Pension Rights
Center in Washington, D.C. (www.pensionrights.org), a consumer
advocacy group that lobbies and assists individuals with pensions.
"While 401(k) plans are simple and portable, the defined
benefit plan is attractive because of its guarantee and the backing
of the federal government."
One of her goals is
to devise a "hybrid" retirement plan over the next
year that combines the strengths of the defined benefit plan
and the 401(k).
Traditional pension
plans are pressured not only by poor market conditions, but demographic
trends such as retirees living longer. Pensions of the 500 largest
U.S. companies could be under-funded by as much as $323 billion
by yearend, according to Merrill Lynch. They were over-funded
by $216 billion just two years ago.
The Pension Benefit
Guaranty Corp., which protects benefits of participants and beneficiaries
in 35,000 defined benefit plans, paid $1 billion in benefits
and took over 104 terminated plans last year. Last March, PBGC
had its biggest takeover ever as it assumed several plans of
bankrupt steel firm LTV Corp. that were $2.2 billion in the red.
Participants of a plan taken over receive an average of 94 percent
of the benefits they had earned.
In addition, misunderstandings about defined benefits plans often arise from their stipulations about salary, age and years of service. Workers may not know the pros and cons of choosing a lump-sum payout versus ongoing benefits when they retire. They may not know how survivor benefits work, or may have lost track of their old company altogether.
"Common questions we're asked are whether the amount they're receiving is correct, or if the company was accurate when it told them they wouldn't be receiving a pension," explained Ellen Bruce, director of the Pension Action Center (www.pensionaction.org) in Boston MA, a non-profit program providing services to those having pension trouble. "In other cases, their employer may have gone out of business or a surviving spouse has been told there aren't survivor benefits."
When you accept a job, find out exactly how much you're entitled to and the formula under which vesting is determined, said Bruce.
"One of the first things to do when beginning with a company is to start a pension file, into which you place every single scrap of paper you ever receive from the plan," advised Allen Engerman, president of the National Center for Retirement Benefits (www.ncrb.com) in Northbrook, IL, a for-profit company that reviews retirement plans for employees. "Send any communication to your company by certified mail so there's a record and no one can deny having received it."
Whenever you ask about your pension plan and don't get straight answers, that's a warning signal, said Engerman.
"Employees must read and make copies of their company's summary plan description and also its plan document, both which can be requested from the firm's human resources department," said Michael Grabhorn, a Qualified Pension Administrator (QFP) and president of Pension Recovery (www.pensionrecovery.com) in Louisville, KY, a for-profit service of Capital Resources Corp. that counsels retirees and employee groups. "If you're unsure of something, never take anyone's word unless you get it in writing, and, even then, make sure the information is the same in those documents."
When talking with co-workers of about the same age and wage scale, you should find your benefits to be fairly close to theirs, concluded Grabhorn. If there's a discrepancy between the numbers you've each been given, find out why.
Editor's Note: Andrew Leckey's column, "Successful Investing" appears regularly in the print version of The Bull & Bear Financial Report.
