How to Check Safety of Company Pension Plan

With the economy catching a recessionary cold, many people are naturally wondering if their bank accounts, mutual funds, municipal bonds, brokerage accounts or other assets are safe from infection. Add to that “worry list” the hundreds of billions of dollars in workers’ pension funds.

Generally, most of the nation’s defined-benefit pension funds are in good shape. (Defined-benefit plans specify the benefits you will get at retirement.) The majority are fully funded or overfunded--meaning they have more than enough assets to pay promised benefits.

But a slowing economy does not bode well for pensions. Overfunded pension plans could become less prosperous as investment returns decline. That may reduce chances that their benefits will be improved in the future.

Companies with underfunded plans--a group that includes such giants as General Motors, American Airlines, RJR Nabisco and United Technologies--will also be less inclined to improve benefits.

Also, companies with dire cash needs could “raid” excess assets in their overfunded plans and use the money for corporate needs. This practice was legitimized in this year’s deficit reduction law. As a revenue raiser, Congress stiffened the tax on companies doing this but made the process much easier, says Karen W. Ferguson, director of the Pension Rights Center, a nonprofit group in Washington.

Other firms in dire straights might terminate their plans entirely, or adopt less generous formulas for determining future benefits. Or they might end their defined benefit plan and substitute a 401(k) plan, where the risk of future investment returns shifts from the company to the employees.

The bottom line: You may not get the future benefits you were counting on.

“If a company for cost reasons freezes a plan or stops it, you may get a fraction of what you counted on getting at retirement,” Ferguson says.

Unfortunately, there’s not much you can do to stop your company from changing the terms of your plan or ending it entirely, Ferguson says.

But you can become more vigilant and knowledgeable about your plan, so at least you can try to discourage your employer from doing anything detrimental, she says. And it doesn’t hurt to know the financial condition of your pension and what you can expect to get from it as of now.

“When people take an interest in how their money is invested, there is less likelihood that anybody will be tempted to play with it,” Ferguson says.

Here are some steps you can take:

* Analyze your individual benefit statement.

You have the right to request this statement once a year. It will tell you whether you are “vested”--in other words, whether you have earned the right to a pension--and how much you could expect to get at retirement age if you stopped working now or if the plan were terminated.

“Ignore any projections of benefits, since plans can be stopped at any time,” Ferguson suggests. If you know where you stand now, you won’t be disappointed should the company cut back, she says.

For help in understanding your benefit statement and your plan’s rules, send for a free booklet, “A Guide to Understanding Your Pension Plan.” It’s available from the American Assn. of Retired Persons, AARP Stock No. D13533, AARP Fulfillment, 1909 K St. N.W., Washington, D.C. 20049. The booklet also provides tips on how to complain if you suspect anything improper.

* Check your plan’s financial condition.

One way to do this is to ask your plan administrator for Form 5500, the financial report your plan must file periodically with the Labor Department. This will tell you how your pension assets are invested, whether management fees and other expenses are reasonable, whether the assets are adequately diversified and whether the plan is getting a decent return on its investments.

“The less diversification of plan assets, the more risk you have,” says Larry Wiltse, consulting actuary at Buck Consultants, an employee benefits consulting firm.

A booklet that can help you interpret a Form 5500 is “Protecting Your Pension Money,” published by the Pension Rights Center.

To get it, send $6 to Pension Publications, Suite 704, 918 16th St. N.W., Washington, D.C. 20006.

* Know if and how you are protected.

A company can close down a plan for several reasons, including if the plan is in serious financial trouble or if the company shows it cannot afford to continue the plan.

If your plan is terminated because of financial troubles, it may be protected by the Pension Benefit Guaranty Corp., the government-sponsored fund that insures most defined-benefit pension plans.

There are some exceptions: For example, government pension plans, plans run by religious institutions, union dues plans and certain plans for company executives are not insured.

For 1991, the PBGC will guarantee up to $2,250 in monthly benefits, meaning that only the highest-paid employees would be unlikely to get full coverage.

To find out if your plan is insured, ask your plan administrator or look at the summary plan description, a document that you are required to receive within 90 days of becoming a plan member.

What if your company goes bankrupt? Pension money is held in trust, so it is safe from creditors. If the plan qualifies, the PBGC will step in to make up for any shortfalls.

If your plan is canceled for reasons other than financial troubles, you can count on getting all benefits you have earned to date.

“They really can’t walk away” from their obligations, Buck Consultants’ Wiltse says. But you’ll lose out on benefits that would have built up in the future.