What We Think People Should Do If They Lose Their Pension Plan
Another one bites the dust. It seems like every month there’s a new casualty in the long string of big name firms (GM, Nortel, Boeing, Bank of America) dumping their pension plans. Often these workers are left with little information, if any, about what to do with the options they are now presented with. Here are some perspectives that any workers in this situation should consider.
Preserve and Verify Your Documentation!
First thing is first. Let’s talk docs before we talk dollars.
Companies terminate pension plans for different reasons. Sometimes it is just because the workforce is shifting demographically to younger workers who want more freedom. Other times it is due to financial stress. When a company’s pension benefit obligation exceeds its pension investment funds available, management has some decisions to make. Terminating the plan is often the only way to avoid going into more shortfall and even defaulting on obligations — which is a very serious matter.
You should be notified in writing at least 60 days before the plan terminates. Keep a copy of these documents — you never know if you’ll need to prove, in the future, what information you were given and what you were not.
You should also keep a copy of your latest pension statement. Save one right away. Any time there is an administrative change, you never know what recordkeeping modifications will come about as a result. Make sure you have your balance as a snapshot so that you can refer back, and you should check it to make sure that it lines up with what the company presents going forward.
By the way, you may also want to use this as an opportunity to check that all your information is correct. Are your beneficiaries up to date, or has something changed (divorce, name change, etc). While you’re at it, verify your address and personal contact information as well.
Before deciding what to do, take a moment to get all the paperwork in order. As financial advisors, we’ve found that people don’t pay attention enough to these little details. Sometimes it unfortunately is too late to fix these errors. We’ve seen entire estates go to the wrong beneficiary. Don’t let that be the case.
Nobody enjoys doing this boring work, but do check up on your documents at least annually and any time there is a major change such as the one we are discussing.
Understand Your Options
Once you’ve got your paperwork in order, the next question is one of options. Some companies will present the option of continuing to invest through the corporate entity, only in a 401k plan rather than a pension plan.
In a traditional defined benefit (pension) plan, you contribute a part of your salary and the company invests it on your behalf. They then return it to you as an annuitized stream of payments when you hit retirement. In this scenario, the company bears all the investment risk. They are the ones responsible for making sure they invest adequately to ensure that your payments are delivered to you correctly. It is their fiduciary obligation to do so.
In a 401k plan, you bear all the investment risk. There are no guarantees that you’ll get any annuitized payments. It’s up to you and the decisions you make. You contribute a portion of your salary to the 401k plan, and the company may provide some sort of match to what you’re contributing.
For those who want to take more risk there are more aggressive mutual funds or ETFs, which are basically baskets of stocks, bonds, or other securities commingled together. For those who are more conservative, there are lower risk options as well. It is the company’s fiduciary obligation to provide a diversified set of options to you (an investment “menu” if you will), but that’s where their responsibility ends. From there on, they are not responsible for any investment results that are derived from the decisions you make.
Consult Your Resources
Being put into the driver’s seat after so many years of being a passenger, so to speak, can be a difficult transition for many people. These workers now are faced with a huge responsibility, one that many will not be prepared for, or have the time or desire to handle.
Before making any investment decisions yourself, consider if you have done proper financial planning. Have you evaluated your risk and return preferences? What is your target return? Are you going to be happy trying to beat that return every year? How much time to you have to devote to understanding the market, and what are you sacrificing to do so?
If making investment decisions on your own is not in the cards for you, consider checking out online resources or even consulting a financial advisor. Advisors won’t have custody, or physical possession, of your 401k assets but many will render advice as a third party without having control of the investments directly.
Should You Opt Out Entirely?
Seeing your employer terminate a pension for lack of funding leads to questions about the financial solvency of the plan. How secure is your money?
Very often, employees are presented with the option not to put any new money into the plan going forward. Sometimes a percentage of their salary is contributed automatically.
Either way, it’s a good idea to familiarize yourself with what happens if the pension plan goes bust at any point in your future. Normally the PBGC takes over and will pay you the pension, but it is capped at a certain amount. Or they may opt to buy an annuity from an insurance company to deliver these payments (Ebeling, 2012).
Either way, this situation is sure to cause you some stress. Consider using outside resources if you aren’t equipped or happy with handling this responsibility.
Summing It Up
Those of us who lived through the recession know the term “too big to fail” is a facetious one. The quest for financial security is one that is left to the individual now as companies take a step back. With so many options to consider, investors are best served by a comprehensive analysis of all available options and the risks that they present.
Before February 28th, ACG Wealth is offering a free 20 minute consultation to any employee whose company has terminated its pension plan. Email firstname.lastname@example.org to set up a time to speak with one of our financial advisors.
Ebeling, Ashlea. (26 November, 2012). What To Do If Your Pension Is Frozen Or You’re Offered A Lump Sum. Forbes. Retrieved from https://www.forbes.com/sites/ashleaebeling/2012/11/26/what-to-do-if-your-pension-is-frozen-or-youre-offered-a-lump-sum/#2eccefba2954