Protecting Your Defined Benefit Plan
by: Iowa Legal Aid
Question: I'm a 20 year employee of a company that has a defined benefit plan. I've been told I am fully vested and am thinking about retiring soon. Are my benefits insured or guaranteed and what can I do to protect them?
Answer: You ask a very good question. Several major company pensions, like United Airlines, have recently failed. In addition, pensions at companies like GM and Ford have serious funding problems. Employees thus need to be more aware of the strength and security of their retirement plans.
The short answer to your question is that your defined benefit plan is partly insured. A defined benefit plan is a kind of retirement plan that promises to pay you a specific monthly benefit for life. For example, a defined benefit plan might pay 2% for each year of service times the average of your highest three years of compensation. So if you worked for 20 years and your highest three salary years averaged $30,000, you could receive $12,000 per year at retirement (20 x 2% x $30,000 = $12,000).
Most private defined benefit plans are insured by the Pension Benefit Guaranty Corporation (the "PBGC"). The PBGC is a federal government agency. It acts much like the FDIC that insures bank deposits. But like FDIC insurance, your protection is limited. If a pension plan fails and is terminated, like the United Air Lines plan recently in the news, the PBGC insures only part of the promised benefit. The amount of protection depends on when the plan ends. The maximum amount of protection changes every year. For plans ending in 2005, the permanent cap is $3,801.14 per month. The limits are for workers who retire at age 65. The amount is lower if you retire before 65 and may be higher if you retire after 65.
Defined benefit plans usually fail because they are underfunded. This means there is not enough money in the plan to pay the benefits that have been promised. This can happen when the plan's investments perform badly. For example, many defined benefit plans became underfunded when the stock market dropped between 2000 and 2002.
The safety of your benefits depends on the health of your plan. The health of the plan depends on the amount of company contributions and the return on plan investments. It is essential to know the health of your plan so you can make informed retirement decisions.
To find out if your plan is healthy and adequately funded, the first step is to gather information. You can ask your plan administrator for a copy of your pension plan's most recent annual report summary. You can also obtain a copy of IRS Form 5500. You can get Form 5500 from your plan administrator, at www.freeerisa.com or from the U.S. Department of Labor.
Currently, access to pension plan funding information is somewhat limited. Federal legislation has been proposed that would change this. For additional information on safeguarding your interests, see Protect Your Pension - A Quick Reference Guide available from the Department of Labor or on their website at www.dol.gov.
If you have questions or need help with your pension, you should contact the Upper Midwest Pension Rights Project at 800-992-8161.
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