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 large-sized
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. 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 government 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; 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 employ er 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 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
UPPER ST. CLAIR
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SPRING 2018
19