INDUSTRY INSIGHT
WEALTH MANAGEMENT
SPONSORED CONTENT
CAN YOU RELY ON YOUR PENSION PLAN ?
Provided by RBC Wealth Management and Eric A . Gregory , CFP ®
A
generation or so ago , if you worked for a medium- or largesized company , you probably got a pension , which you could count on to provide steady , predictable payments throughout your retirement . But things have changed . Today , far fewer businesses even offer pensions , and many of the ones still available are on shaky ground . The same is true for some state and local government pension plans as well . So , if you ’ re covered by a pension , should you be worried ? And should you take steps to help bolster your retirement income ?
To begin , it ’ s important to take a look at what ’ s behind the troubles facing pension funds today . Essentially , over the last decade , many of these pensions ( both private and public ) became underfunded . The problems were either started , or made worse , by the Great Recession of 2008-09 , which was accompanied by a sharp drop in the stock market . Since then , the market has more than regained all its losses , but many pensions still haven ’ t recovered . Private pensions also face potential threats when companies merge or are taken over by other firms . And state and local governments ’ pension plans have been harmed by overly optimistic projections regarding investment returns and by political leaders ’ decisions to move money that should go to pensions into other , more visible areas .
While private and public pension funds may share some similarities when it comes to landing in trouble , they diverge in their options for getting out of it .
For example , if a private pension plan is in jeopardy , it can take actions that may not work out in your favor . Instead of building its assets , an underfunded plan can change its benefit formula so that your eventual payout will be reduced . A company can also “ freeze ” its plan to stop further accruals , or even terminate the plan .
On the other hand , a public pension plan is greatly constrained in what it can do to relieve financial stress . Most states offer pension protection , either through their state constitutions or through a court ’ s interpretation of the constitution . Of course , no one can predict the future , and a real crisis may loom for some states whose plans are drastically underfunded , but whose legislatures simply lack the power to change the restrictions imposed by their constitutions .
However , even if a private pension does not offer the safeguards of a public plan , it doesn ’ t mean you ’ re defenseless if your plan is in danger . Actually , your pension carries with it some powerful protection , especially if you are “ vested ” in your plan . ( Vesting is the rate at which benefits are fully owned by you . Vesting schedules vary by retirement plan , so , for instance , you might have to put in five years before becoming fully vested .) As long as you ’ re vested in the plan , it must pay you a benefit at some point , even if your company is sold , and even if the buyer is based overseas .
Also , if your plan is terminated without sufficient money to pay all benefits , the Pension Benefit Guaranty Corp . ( PBGC ), a federal agency , can help you out – to a degree . The PBGC is only required to pay vested benefits up to a certain amount , which varies by an employee ’ s age and the year in which the plan is terminated . However , this protection may become shakier in the years ahead , as the PBGC itself is significantly underfunded . ( The PBGC does not insure pension plans sponsored by state or local governments .)
If you have doubts about your company ’ s pension plan , what can you do ? If you ’ re still employed , review the summary plan description and
annual benefit and funding notices , which your employer should make available to you . It ’ s generally a positive sign if your plan ’ s assets are at least 80 percent of liabilities .
You can also be proactive about your pension if you ’ ve already left your company . For starters , upon your departure , get a letter stating that you ’ re vested in the pension plan , and always keep your pension documents in a safe , accessible location . If you learn that your former company has been sold , or will be sold , reach out to the company to find out what will happen with the pension plan .
Here ’ s another suggestion : Look beyond your pension plan for retirement income . If your employer offers a retirement plan outside your pension – such as a 401 ( k ) for companies , a 403 ( b ) for nonprofits , or a 457 ( b ) for state and local government employees – try to contribute as much as you can afford . At a minimum , put in enough to earn your employer ’ s matching contribution , if one is offered . And whenever your salary goes up , boost the amount you invest in your retirement plan . A financial professional can help you decide how to allocate your money among the various options in your retirement plan based on your goals , risk tolerance and time horizon .
You will work many years to earn your pension – so you deserve to get as much out of it as you can . While you can ’ t control how your pension is managed , you can certainly stay aware of your plan ’ s status and health and of the protections due to you , and you can build as many financial resources as possible outside your plan . By taking these steps , you can help improve your prospects for enjoying a comfortable retirement .
This Industry Insight was written by Eric A . Gregory , CFP ®.
This article is provided by RBC Wealth Management on behalf of Eric A . Gregory , CFP ®, a Financial Advisor at RBC Wealth Management , and may not be exclusive to this publication . The information included in this article is not intended to be used as the primary basis for making investment decisions . RBC Wealth Management does not endorse this organization or publication . Consult your investment professional for additional information and guidance .
RBC Wealth Management , a division of RBC Capital Markets , LLC , Member NYSE / FINRA / SIPC
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