Can You Count on Your Defined-Benefit Plan?

A defined-benefit plan is a pension plan where the company promises to pay participants a certain benefit, with the entire cost typically funded by the company. Those plans are now under considerable pressure.

The recent market declines have seriously eroded the value of pension assets, while declining interest rates have dramatically increased liabilities for future benefits to retirees. The shortfall is so significant that many companies will now be required to start putting significant amounts of cash into these plans or look at other alternatives, such as reducing or elminating future benefits. While companies can't eliminate benefits that are already earned, they can freeze benefits at current levels and reduce or eliminate future benefits.

Since a significant portion of pension benefits is typically earned at the end of your working career, these changes can leave you with significantly lower benefits. These plans tend to calculate benefits based on your salary and years of service, rewarding longevity. For instance, a plan might credit you with 1.5% of your average salary for each year worked, with your average salary calculated using your earnings for the last five years. So, if you work 25 years, you would receive 37.5% of your salary as a pension. However, if the plan was terminated after 10 years, you would still have to wait another 15 years to receive benefits and those benefits would only equal 15% of your salary.

If your pension benefits are a critical component of your retirement plans, those changes may seem unfair, especially if you don't have enough time to accumulate sufficient additional assets on your own. However, these types of changes are perfectly legal, as long as they apply equally to all participants and don't discriminate against older workers.

What can you do? Take another look at your retirement plans to determine how critical your pension benefits are to those plans. To be conservative, refigure your plans assuming your pension benefits are only half or less of what you currently expect. What will you have to do to make up this shortfall?

Also keep an eye on your pension plan so you'll know immediately if your employer plans to make changes. Then, get together with other workers and let management know how important these benefits are to you.