Checking Out Your Pension Plan

About 89% of American companies offer traditional pension plans to their workers. But few of these workers seem to know how their pensions are invested.

Is the money invested in stocks, bonds, mutual funds, commodities or real estate? Is the plan backed by the Pension Benefit Guaranty Corp., which ensure that most people who have defined benefit plans will get at least a portion of what they have been promised? Is it invested in company stock or bonds that depend on the continuing health of the firm they work for?

If you expect to need your company-sponsored pension benefits when you retire, these are things you should know.

How much can you find out and where do you go to get the information?

To some degree, that depends on what kind of pension plan you have. There are two basic types: defined benefit plans and defined contribution plans.

In defined benefit plans the employer usually does all the contributing, all the investing and simply informs the employee how much their estimated annual benefit will be if they retire at specified points in time while earning particular salaries.

In all but a few cases, if a company with a defined benefit plan is unable to meet its obligations to retirees, the Pension Benefit Guarantee Corp. will pay at least a portion of what the company had promised.

However, those who have a lot at stake will find that they get only a small percentage of what’s due.

PBGC will now pay up to $27,000 a year for retirees over 65. Those who retire at 60 would get no more than $17,550, said Bruce Ashton, a partner at the Los Angeles law firm of Reish & Luftman, which specializes in ERISA law.

If your money is in a defined contribution plan, you get no PBGC protection at all.

Defined contribution plans are known by dozens of names--target benefit plans, profit sharing plans, money purchase plans, employee stock ownership plans and 401(k) plans, for example.

Instead of promising a set benefit at the end, the company contributes a set amount or allows the employee to contribute each year to the plan. The employee is then usually given the choice of how to invest the money within certain parameters. What workers get at the end will be determined by how well they choose and how much they save.

It is usually far simpler to get information about how a defined contribution plan is invested than about the investments in a defined benefit plan. After all, with a defined contribution plan the employee is at least choosing among investment categories. And most companies are willing to give them ample information to make those decisions. However, even with these, if employees want details, they must ask.

For example, most employers will tell workers that their 401(k) “guaranteed interest” plan is backed by investment contracts issued by insurers. But if you want to know which insurers, you’ll have to say so.

Savvy pension managers may also have current investment ratings on all these companies, which makes the employee’s quest for information simple.

When the pension manager doesn’t have current investment ratings on the companies in which your plan is invested, you can usually find them at the public library. There are a number of companies that rate the health of financial services firms. Some of the bigger names in the business are Standard & Poor’s and Duff & Phelps. Ask your librarian about what kinds of business reference books they have available.

Defined benefit plans are another story. Managers of these plans often communicate with employees just once a year. And then they only give a sketchy outline of the plan’s assets and liabilities and your estimated benefits at retirement. Usually, if the plan is protected by the Pension Benefit Guaranty Corp., you’ll get a notice saying so at this time too.

For some, that’s all the information they need. If they’re fully covered by the PBGC, they needn’t worry much about the solvency of the plan.

Those who are not fully covered, however, may want to know more. And the Employee Retirement Income Security Act says companies must provide a bit more to those who ask.

If you have a problem getting a more detailed form 5500, you can call or write the Department of Labor, and they should be able to force the employer to comply with the law.

You should also be able to get a reading on the pension manager’s investment philosophy, which should help you determine how comfortable you are with the safety of the plan.

What you usually can’t do is change the plan’s investment strategy, Ashton said. If the plan managers lose money, you may be able to file suit later.

What you can do is use the information to plan your own retirement strategy.