The state of pensions in America is on rocky ground. In recent years companies have either stopped offering pensions or significantly cut pension plans for current and future employees. In fact, only 16% of Fortune 500 companies offered a defined benefit program to new hires in 2017 as compared to 59% among those same employers in 1998 according to insurance company Willis Towers Watson.
Worse, though, than simply not offering pension plans to new hires is the rapid decline in pension benefits for current employees. We have seen this phenomenon sweeping the nation and have seen it flash across headlines and news stories: a bankrupt company leaves many workers’ pensions in danger.
As an extension of our pension series, we wanted to bring you an article that asks one of the hardest questions about the nature of pension plans: what to do if your company cuts your pension.
This question doesn’t have a single answer and the one that is right for you can only be discovered by close scrutiny of your retirement plan and counsel from your financial advisor.
Know the status of your plan
For many employees, a pension cut comes in one of two ways, with the plan being frozen or terminated. These two factors both have similar outcomes but it is important to know the difference.
If your pension is frozen, that usually means that benefits are closed to new employees and current employees will stop accruing benefits but the plan itself is still active. Since the plan is technically still active, most employers will make the employees wait until retirement age to take their benefits, either in a lump-sum or annuity-based payments.
When a pension plan is terminated, the plan is no longer active and the employees are often left with the choice to take a lump-sum now or defer benefits to an annuity payment in retirement.
As both of these options suggest, the employees shouldn’t lose any benefits that they have already accrued, rather those benefits would stop at the point of freezing or termination of the plan. But promises are much easier to make than they are to keep.
Unfortunately, several cases have shown that due to bankruptcy, workers pension benefits have suffered. To protect pensions in the case of bankruptcy, a small government agency called Pension Benefit Guaranty Corp was put into place. This federal agency collects insurance premiums from companies in order to cast a security net for employees should their employer not be able to cover the cost of the pension. You can think of this like pension insurance, but it isn’t the end-all-be-all. This agency has been responsible for covering many employee’s pension benefits. Overburdened by requests and obligations, the agency’s cash flow is stretched thin, leading to a significant decrease in monthly checks for employees.
If your pension plan is undergoing a change, you will have a couple of options for how to handle the money you will get. Let’s take a look.
Lump-sum vs annuity
If your pension benefits stop, your company will often give you the option to take the money in a lump sum or in the form of monthly payments in retirement (annuity).
Earlier in this series, we talked about the different payout options for your pension and the benefits and drawbacks of each one. This scenario adds another layer of complexity to that decision.
Many advisors won’t recommend their clients select a cash-out approach, especially with something as large as a pension balance. But, in the case of a frozen or terminated pension plan, this option shouldn’t be eliminated right away.
Taking a lump sum would allow you to roll that money over into an IRA and take control (in concert with your financial advisor) of your investments. While there is an inherent risk in such an action, it does offer you more freedom, flexibility, and control over the money in your account.
By deferring your payments into an annuity in retirement, there is a “guarantee” for those monthly payments for the rest of your life and potentially your spouse’s life too depending on the annuity structure you select. But with so many companies defaulting on their pension payments, millions of workers experience drastic cuts to their monthly payments.
Take Marsh grocery stores in 2018. The private equity firm who purchased the stores filed Chapter 11 bankruptcy, recouping all of their investors’ money yet leaving more than $80 million in debts to workers severance and pension according to a feature article in the Washington Post.
This story, along with hundreds of others like it, forces us to ask the question of how trustworthy is the pension provider? If the pension provider is on strong financial footing, they may be able to keep their promise of your monthly payments, but that isn’t always the case.
So many workers rely on their pension for money in retirement, and when those companies don’t deliver on their promises, many workers are left to clean up the mess.
When your company cuts your pension, whether they freeze or terminate it altogether, employees need to take proactive action to protect the retirement savings they have earned so far and continue to grow it to support them through their golden years.
Revisit your retirement plan
Your retirement plan can and should adapt as your needs change. If your company cuts your pension, your retirement plan may need to go in a new direction, making it important to think through the following:
- Additional retirement income channels
- How else will you earn money in retirement (401k, IRA, Social Security, part-time job, etc.)
- The balance of your current retirement savings
- What have you saved aside from your pension?
- What are your monthly income needs?
- Your retirement timeline
- This setback in your pension may mean that you have to extend your working years or your savings strategy may need to take a more aggressive approach. Work with your advisor to come up with a specific plan for you and your needs.
- Your retirement goals
- How will your lifestyle goals be impacted?
- Debt analysis (mortgage, loans, etc.)
- Revisit your debt-repayment strategy
There is no right or wrong answer to any of the questions posed above. It all comes down to your unique set of needs and goals for retirement and which course of action you are most comfortable with.
Work with your financial advisor before making any decisions about your pension. By assessing your full retirement picture, you will be able to make the best decision possible for you and your family’s needs.
Here at Goepper Burkhardt, we focus on the big picture of your retirement plan. We are passionate about helping our clients figure out how each piece, whether it is financial, health, or lifestyle, fits together to give you the retirement you have worked so hard for. If you would like to talk more about how your pension plan will fit into your retirement plan, give us a call.