A pension is a retirement plan meant to provide funding in years after retirement usually after age 65. Either the employer or employee set aside a % of the employee’s salary and store it in an account, with or without taxes paid. The account may be combined with the accounts of other employees, sometimes into a fund. The money can be used to invest in stocks, bonds or invested in nothing, just in a bank account.
At retirement age, the owner of the pension, their spouse/ex-spouse and children can all collect a monthly stipend to live on from the pension fund (or from contributions made by current employees) while the rest of the employee’s fund is still invested in the market. The owner of the pension account can collect a monthly stipend before retirement age but with a penalty fee if they are not disabled. The fee may be additional taxes, a reduced monthly stipend amount, or both. If the owner of the pension is disabled, they and their family members can collect the monthly stipend without penalty.
Defined benefit plans involve the conventional idea of a pension. The employee contributes a non-optional percentage of their salary. After 10 years, the employee is eligible for pension benefits. Defined benefits state how much will be paid out to the employee upon retirement. A hybrid plan defines both
The pension may be structured with the contributions or the benefits or both defined (hybrid). Defined contribution plans usually involve a 401K which involves optional contributions from the employee and an employer match of up to 3%. Upon retirement, the 401K allows the former employee a monthly stipend dependent on the success of the investments. There is no guarantee of the retirement monthly stipend amount. For the past 30 years, defined contribution plans have been the norm while defined benefits have been phasing out. Private, for-profit enterprises primarily offer defined contribution plans to their employees.
Putting money away in a pension fund may seem like the only responsible way to save for retirement but there is a risk that the pension fund could lose value. The fees and risk of devaluation is supposed to be minimized (according to federal law) to ensure that the pension account will be stable enough to provide benefits. In a defined contribution plan, the risk of not having enough money during retirement rests on the employee/retiree. In a defined benefits plan, the risk of not having enough money to pay out benefits to retirees rests on the managers of the pension fund, usually a combination of company management and labor representation. Additionally, the PBGC guarantees up to a certain amount for private and for public pensions. There have been a few pensions where the fees and valuation depleted pension funds: namely US Airways Pilots and Bethlehem Steel. Really the entire airline and steel industry had their pensions fail at some point.
When pension plans fail or the employer ends the pension plan, there is still a guaranteed payout of benefits from the PBGC Pension Benefit Guaranty Corporation (up to a certain dollar amount depending on your state, but currently about $57,000). The PBGC is a private company created by the federal government to ensure payouts until all the promised benefits are paid out in a lump sum or annuity. The PBGC is also responsible for investigating what went wrong if the pension was a failure.
If a pension plan does not fail but transferred to an insurance company because the employer wants to give up responsibility, the PBGC is no longer responsible for ensuring benefits, the State Guaranty Associations would then take responsibility. Guarantee limits vary by state. Each state provides a guarantee of at least $100,000 for the present value of an annuity. If the value of your benefit exceeds the amount protected by your State Guaranty Association, you can submit a claim for the excess in insolvency proceedings against the estate of the liquidated company.
Did you have a pension that failed? Did you retire from an airline or a steel producer that failed maintain their pension contributions? Tell us how that surprise impacted your retirement and if you were able to recapture some of that via the PBGC.