What if your pension runs out of money? «

    What if your pension runs out of money?

    The zero-interest-rate policy in the U.S. continues to wreak havoc on those saving for retirement.

    Case in point: Many companies are pouring cash into their defined benefit pension plans because of the low interest rates, according to a report this week in The Wall Street Journal. According to the report, companies are required to calculate the present value of the future pension liabilities—how much they need to pay out to retirees—by using a so-called discount rate, which based on corporate bond yields. As those rates fall, the liabilities rise. And as those liabilities increase, companies make up the difference by pouring cash into their plans.

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    /conga/personal-finance/retirement_seo.html 259847 So what does this trend portend for workers at the firms that have traditional defined benefit plans? What should workers do at firms where this might be happening or could happen? And what might small employers who have defined benefit plans consider doing to avoid problems?

    Prepare for the worst
    Not surprisingly, some experts say there’s plenty to worry about, others say this trend is much ado about nothing, and still others say workers with a defined benefit plan—funded or not—should be thankful for what they have.

    At one extreme is Ary Rosenbaum, an ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm. He says workers ought to prepare for the possibility that their employer will freeze their pension benefit or terminate the plan.

    And if that should happen, consider, at a minimum, increasing the amount of money you contribute to other retirement accounts, such as an IRA or 401(k) to make up for what you might lose in pension payments.

    Others, meanwhile, say that workers whose employers have a well-funded pension plan need not worry as much about their plans being frozen or terminated. “Workers at healthy firms shouldn’t worry, because the company stands behind the promise,” said Ron Surz, president of Target Date Solutions. “That said, I don’t think there are many defined benefit corporate plans left. Defined benefit plans are now mostly union and government plans.”

    Click to Play Companies are pouring cash into pension plansSome of America’s biggest companies are shifting cash that could be used for development or expansion into pension funds as low interest rates designed to spur the economy push up pension liabilities.
    And still others remind us that there’s not much a worker can do whether a plan is funded or underfunded. “First, workers have very little influence over the actual funding requirements of true pension plans,” said Christine Russell, a retirement strategist for Christine Russell Retirement Consulting. “The amount a company must fund is determined through complicated formulas calculated by actuaries.”

    So what can employee today do if they are covered by a pension? “Thank their employer for continuing the pension plan,” she said. “Many companies no longer offer such plans, so an employee covered by a pension is a lucky person, indeed.”

    What’s more, she said employees should let the human resources/employee benefit department know that they value this benefit. “Often, it can seem like this substantial and important benefit is ignored by employees,” she said.

    By way of background, there are more than 27,500 private-sector defined benefit plans covering more than 44 million American workers, according to the Pension Benefit Guaranty Corporation.

    You can learn more about how employers can terminate a pension plan or how to check if your plan is underfunded at General FAQs about PBGC.

    To be fair, it’s possible that this trend where firms pour cash into defined benefit plans may not continue, or at least it won’t at some of the country’s largest companies.

    The aggregate deficit in pension plans sponsored by S&P 1500 companies decreased by $74 billion to $482 billion as of the end of January 2013, according to report released this week by Mercer. What’s more, Mercer said in its release that the funded ratio (assets divided by liabilities) improved 3%, up from 74% to 77% during the month. This deficit compares to an aggregate pension deficit of $557 billion on Dec. 31, 2012 and is a slight improvement over the $484 billion deficit and funded ratio of 75% at the end of 2011, the company said.