Pension plans' funding shortfall exposes need for more options
By Diane Lewis, Globe Staff, 6/26/05
The last thing Terrill Fox, 60, of South Dennis, expected was that she would have to work after she retired. After all, Fox, a flight attendant for United Airlines for 34 years, had worked for a firm with a traditional defined benefit plan, a pension with a monthly payment based on her wages and tenure.
But this spring, 11 months after Fox retired, the financially strapped airline ended its pension plans. The Pension Benefit Guaranty Corp., which is experiencing a shortfall of $23 billion, will pay $6.6 billion of United's $9.8 billion pension liabilities.
Fox is worried that future monthly payments will be less than the $2,585 she receives because the PBGC caps distributions based on age at the time of retirement. Fox was 58 when she retired.
''The PBGC has said the cap for payments is $45,000 for people who are 65, but it goes down every year under 65,'' said Fox. ''That will definitely make a difference. I only got to enjoy four months of retirement before I started hearing comments about United not being able to fund our pension. Now, I have to get a job.''
New data suggest that Fox might not be alone. According to the PBGC, traditional defined benefit plans experienced a funding shortfall of more than $350 billion in 2004.
In addition, the number of Fortune 1000 firms that either ended or froze payments into such plans increased 58 percent in 2004, Watson Wyatt Worldwide, the benefits consulting firm, said in a report.
Watson Wyatt studied the 627 Fortune 1000 companies that had defined benefit plans in 2004, and found that 71 ended their plans or froze benefits last year, up from 45 employers in 2003. In 2002, by contrast, 39 employers froze or discontinued traditional defined benefit plans.
The findings reveal that 11 percent of the companies surveyed in the Fortune 1000 took such action last year. In addition, 4 percent — or 25 firms — closed pension plans to new recruits in 2004.
Sylvester Schieber, director of US benefits consulting at Watson Wyatt, said the decline in companies offering defined benefit plans underscores a growing need for more employer options, including hybrid plans that combine the features of defined contributions and defined benefit plans. Defined contribution plans, such as the 401(k) are funded by workers. Defined benefit plans are funded primarily by employers.
''Unless legislative action clarifies the defined benefit system soon, the current trend of freezing and terminating plans will likely continue to accelerate,'' Schieber said in a statement.
Karen Friedman, policy director for the Pension Rights Center in Washington, said US workers and retirees shouldn't panic. Most retirement plans are healthy, and the fact that a firm might have an underfunded plan does not mean that it is in trouble.
''If the plan is underfunded and your industry is in trouble, then it is more likely that the plan will be terminated,'' she said. ''However, if the economy goes up and interest rates pick up, your plan could be better off in the future.''
Watson Wyatt's findings seem to partly support such claims. The benefits consulting firm found that about 50 percent of the companies in the Fortune 1000 that terminated plans fell off the list a year afterward, suggesting they were in financial trouble or experienced weak sales. In addition, many of the firms that froze or discontinued plans in 2004 had poor credit ratings.
Ellen Bruce, director of the Pension Action Center at the University of Massachusetts at Boston, said workers should investigate their employers' plans.
''The most fundamental advice is to find out whether you have a plan and what it is,'' she said. ''A surprising number of people do not even know. They get a job, they have a salary, but are not aware of their benefits.''
Bruce recommends workers keep records of the various pension plans they've had over the years as they change jobs or their employers' merge or restructure. Finally, Bruce said workers should diversify their holdings in 401(k) plans rather than place everything in company stock. And have some savings tucked away.
''The people who are most secure are those who have both a defined benefit plan and a defined contribution plan like the 401(k), which is the largest type of defined contribution plan.''
Specialists like Friedman are lobbying for government incentives that will keep defined benefit plans alive.
''We must try to stop companies from using bankruptcy courts to terminate plans and abrogate union contracts or dump liabilities onto the PBGC,'' said Friedman.
''We must also come up with interim solutions,'' he said. ''If a firm is in distress, we should come up with a plan to temporarily freeze company contributions until they can fund it. Congress is looking at some funding rules, but we don't want to make the rules so burdensome that companies jump out of the system.''
Specialists advise that employees also find out exactly how much they are due at retirement and how, for example, an early departure could affect their monthly payments.
They say workers should pay close attention to the details of their plans.
Information on your retirement plan, including a summary of benefits, should be available in the company's human resources department.
For advice or additional help, contact the New England Pension Assistance Project at UMass-Boston at 888-425-6067. Readers should also contact The Pension Rights Center at http://www.pensionrights.org/pages/help.html.
Diane E. Lewis can be reached at firstname.lastname@example.org.
The Employee Benefit Research Institute, a nonpartisan organization in Washington, D.C., offers the following descriptions of basic types of retirement
- Defined benefit: This plan is traditionally
paid in the form of an annuity. According to
the institute, the benefit is based on a
formula, typically involving salary and length
of service. Traditionally, these private
pensions have been funded by the employer.
- Defined contribution: This plan is financed
by you, primarily. Some employers will
contribute a percentage. Others do not. The
plan can go up or down depending on the
stock market and the type of stock you choose
to invest in. You can take this plan with you
when you go to another job and roll it over
into the new employer's 401(k) plan or an
IRA. Younger workers can take the money
accrued with them. However, some older
workers lobbied against this plan after their
defined benefits plans were converted to cash
balance. They maintain the plan pays less
upon retirement than the traditional plan they
- Individual retirement account: This plan
lets you set aside money invested yearly in an
indiviudalized account. There are different
types of IRAs.
- Keough: Tax deferred retirement accounts
for self-employed workers or people employed
by unincorporated businesses.