3 Signs Your Pension is in Trouble

If you are fortunate enough to still work for an employer that offers a defined benefit or pension plan (as oppose to the more popular defined contribution plans such as 401(k)s or tax savings accounts), there are at least 3 signs that will tell you when your plan is in trouble. Defined benefit plans, which are the traditional pension plans that have mostly been replaced by the 401(k) style defined contribution plans, are a great benefit for employees since they are funded solely by the employer. There are about 30,000 such plans in existence in the United States, according to the Pension Benefit Guaranty Corporation (PBGC) in Washington, D.C.

Before discussing signs for knowing when your pension plan is in trouble it is important to not confuse defined benefit plans with defined contribution plans. 401(k)s are not pension plans. They are contributed to by both employees and employers and are subject  to contribution limits that are established by Congress. Although they are also used to fund requirements and fall under the governing requirements of the Employee Retirement Income Security Act of 1974, this article is focused solely on defined benefit plans.

Signs of Trouble for Pension Plan

The signs that indicate that your defined benefit plan is in trouble is when the employer is experiencing financial problems and unable to make regular contributions as required by the plan document. Another sign of concern is when the employer defers contributions for a period of years before resuming them, or when an employer contemplates the conversion of the defined benefit plan into a defined contribution plan.

Employer Experiencing Financial Trouble

When an employer who established a defined benefit plan experiences financial trouble they will typically look for places to cut costs by reducing or eliminating pension contributions. The thought process behind this is that when economic times improve for the company they can make up missed contributions in order for the plan to remain solvent. Unfortunately, this approach can result in the loss contributions that weren't made. If the company were to fail as a result of the financial problems, PBGC will step in as guarantor, but only for a percentage of the amount due any retiree.

Deferring Contributions for Several Years

Some companies decide to defer contributions to a defined contribution pension plan for a number of years to free of cash flow and use the money for other areas of the company. An underfunded pension obligation is a bad sign for retirees because if more employees retire than what was projected for the plan, it will force the employer as plan trustee to make changes to the pension plan in order to meet their pension payment requirements.     

Converting a Defined Benefit Plan into a Defined Contribution Plan

If an employer contemplates converting their defined benefit plan into a defined contribution plan, this will result in a lower payout to the plan's participants. This is because defined contribution plans, by their vary nature, limit the amount of contribution that can be made by employees and employers, whereas in a defined benefit plan the plan's benefit is based on the average of the employee's final salary.  

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