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How To Stop The "Pension Pirates" From Stealing Your Retirement
You're sitting on the deck of your retirement yacht as it sits in the dock. You've got plenty of retirement money below decks in a company pension chest. You already know what your plans are. There's plenty of money to enjoy vacations, family and easy days on the golf course.
Before setting sail into the retirement sunset you did some things. You worked hard to make sure your retirement yacht was in tip top shape. Any excess weight like debt was trimmed and dropped into the sea. According to your retirement chart your course should be clear.
But what if you went below decks and found your pension chest half gone or completely empty? My friend, you've been secretly hit by the "pension pirates!"
They Wear Suits and Designer Loafers
Unknown to unsuspecting employees, big name corporations all over America are secretly stealing your hard earned pensions. These "pension pirates" don't dress like traditional pirates. They're corporate executives who wear designer suits and loafers. They systematically steal from you, by taking what's yours. Here's how it works.
When a company can't pony up the bucks to fund those pensions they've promised, someone else is called on to foot the bill. Have you ever heard of the PBGC? It's a little known government agency with a job more important than the almighty IRS.
Back in the 1960's employees didn't have defined benefit plans. As a result most employees lost their pensions. In 1974 the Employee Retirement Income Act (ERISA) was passed. This was to make sure this never happened again. Out of this act came the Pension Benefit Guaranty Corporation. But ERISA and the Internal Revenue Code had one defect. Neither guaranteed the PBGC would be able to fully pay pension benefits if corporations failed to pay their end of the deal.
The Pension Benefit Guaranty Corporation pays the money owed you through corporate pensions. It's a government "guarantee" that you'll get the pension benefits you earned.
Some corporations, due to inflation, lack of profits or bankruptcy are not in a position to pay out pension benefits. If promised benefits aren't paid, this could lead to a windfall of lawsuits. Corporate executives can "pass the buck" onto the PBGC. On the surface this has been fine for decades.
But since 2001 that pension treasure chest has been losing value.
A Dwindling Pension Chest
Part of the job of the PBGC was to establish premiums paid by participating corporations to partially fund pension plans. When ERISA was enacted in 1974, rules were set for funding of these pensions. Plan sponsors pay $19 per employee a year. In 1987 the PBGC added a variable rate premium. This encouraged corporations to better fund the pensions.
For every $1,000 of unfunded benefits the corporations or plan sponsors pay $9 per employee. As of 2004 it seemed everything had been working fine. That year the PBGC received a whopping $1.5 billion in premiums and $800 million in variable rate premiums. But that was until they paid out $3 billion in pension benefits to employees and their beneficiaries!
Corporations secretly underfund their pension plans with funding credits. They earn these by contributing more than the required minimum premium in other years. But if they run into financial trouble they don't have to pay this premium during those years. The PBGC doesn't rate the funding credits according to their real market value. Even worse the funding credits earn interest according to its rate of return on assets. If the assets lose market value and falls below the funding credit amount, the assets in the plan won't cover the pension benefits. This is the sword "pension pirates" use to steal your hard earned retirement.
Things became worse when the Government Accounting Office (GAO) started digging. They found that in 1996 the PBGC had its first accumulated surplus. By 2002 the surplus bumped up to $10 billion! But in 2001 the funding credits had done damage. The GAO discovered the PBGC's finances had headed in the wrong direction. By the end of 2002 they had a $3.6 billion deficit. The problem was so alarming that in July of 2003, the PBGC which guarantees the pension benefits of 34 million employees was listed as "high risk." Then in 2004 the PBGC had a net loss of $12.1 billion. Its total deficit hit $23.3 billion!
Here's what this means for employees with pensions. If your company can't fully pay its PBGC premiums due to funding credits, your pension checks will be much smaller. You may not have the time and money to enjoy your retirement. More importantly your money will outlive you.
But here are 3 easy ways to protect your retirement stash from the "pension pirates."
Three Rules for Pension Protection
Rule #1: Know the Rules
Let's be honest. Few people pay close attention to their pension plans. They depend on Plan Managers. Make sure you fully understand all the rules of your pension plan. The plan is designed to pay you or your beneficiaries. This isn't money for pension managers or corporate executives. These plans are designed to give you a steady paycheck when you retire. Ask your Plan Manager for a list of all of the rules and benefits of your pension plan. Request a Summary Annual Report or SAR. If your plan files a 5500 form this report is sent to you each year. It tells you how your pension plan is doing.
Rule #2: Check Your Pension
There are too many corporations with pension plans. This means the government can't check them all. It's up to you to diligently watch over your pension. Catching problems early reduces any chance of loss of benefits during retirement. Ask Plan Managers plenty of questions. Remember to request and read your SAR report each year. Carefully read the financial statements in the SAR report. If you're diligent each year you have a better chance of outliving your retirement income.
Rule #3: Grow Your Money
You've heard the saying, "Never put all your eggs in one basket." This is important when it comes to your retirement income. Develop other sources of income. These include IRA's, money market accounts and 401k plans. Carefully watch their performance along with your pension. In the end you're responsible for your retirement income.
Keep the "pension pirates" at bay, by following these 3 easy rules and staying diligent. They will increase your chances of sailing into your retirement sunset!
Clyde McDade is a Financial Copywriter. He can be reached at email@example.com.