A worker toils for twenty, thirty or more years and is promised a pension upon retirement. He or she must make the assumption that the promise will be kept. In recent years the promises have been broken and people that have been retired for years have found their financial situation much different than what they had planned for.
To get a clear view of the reasons for this betrayal we need to take a simplified look at two of the basic types of retirement plans.
Defined benefit plans
The oldest plans are the defined benefit plans.These were developed in the golden age of American industry and provide a fixed “guaranteed” payment. Money is put into the plans by the employer during the employee’s working years. An interest assumption is used to determine if the plan is funded adequately to provide the guaranteed benefit. The interest assumption is just that, an assumption. If the percentage does not reflect the actual performance of the investments, then the plan is underfunded. If it is underfunded the employer must come up with more cash to fund the plan.
The financial crises of 2008 clearly demonstrated what happens when interest assumptions are glaringly incorrect. Real interest and market performance plummeted leaving many corporations with these plans unable to fund them. Some companies declared bankruptcy. What happens in bankruptcy to defined benefit plans?
They are protected by the Pension Benefit Guarantee (there’s that word again) Corporation. There are multiple requirements to collect the pension and reductions in payout are common. The PBGC is funded by premiums paid by companies that have defined benefit plans. It is possible that with enough bankruptcies the payouts will exceed the premium contributions.
If a giant corporation like General Motors put its plans into the PBGC the PBGC would have to go to congress for help and all those receiving their pension from that organization would be in jeopardy.
Defined benefit plans are becoming a dinosaur. Most companies have terminated these plans and switched to a defined contribution plan to be discussed next. The exceptions are government employees. Government agencies continue to fund these programs for one simple reason; their unions want them. They provide guaranteed benefits superior to those in the private sector. The employer (government) does not have to make a profit and does not have to worry about funding them. They simply raise taxes and fees to do so. This works well until the tax and fee base simply cannot support them.
The Detroit bankruptcy is a prime example. Many public employees are now forced to change their lifestyle even though they may have been retired for many years.
Defined contribution plans
As the name implies, these plans take put an amount every period into a 401K or IRA. When a person retires the amount they receive is variable depending on the contribution amount and the investment performance. Companies love these plans because they no longer have to fund a guaranteed payout.
Upon retirement the pensioner has several options including a monthly withdrawal from the IRA/401K or they may purchase an annuity from an insurance company which can guarantee (there’s that word again) an amount payed each period.
Both basic options have risk. For example the insurance company can itself become insolvent. They will have insurance for the annuity holders but the amounts are determined by the state. It is possible that the insurance is insufficient to cover the guaranteed payout. The pensioner is subject to the audit or lack of audit as to the remaining balance in their account.
Where to turn
There are government agencies that are supposed to help those who have been harmed by events beyond there control. How do they work? Not very well.
In the case of the defined benefit plan the PBGC will determine your pension and it may be far less that you had originally planned for.
In the case of the Employee Retirement Income Security Act (ERISA) and the Employee Benefits Security Administration (EBSA), I personally have found them to be essentially unresponsive to individual requests. They are supposed to set plan standards for companies but if you as an individual have been harmed by legal or illegal manipulation of a retirement plan it is unlikely you will get help from this agency.
The recent scandal regarding the VA medical center’s total disregard for some of the people they are supposed to serve exists in other agencies as well. Know your retirement plan. Get as much information as possible and above all do not believe The Promise or The Guarantee. Oh yes, don’t rely on your government to help.