Defined Benefit Plans

Defined Benefit Plans

How defined benefit plans work

Why defined benefit plans are disappearing

A short history of defined benefit plans and the PBGC

How to check on your plan's health

Dangers to public employee pensions

How defined benefit plans work

Employer promises to pay worker a certain defined (known) amount

Typical example

Employer promises to give monthly pension benefit of 1 percent of monthly pay times the number of years worked

(20 years) * (1 percent / year) * (former salary of $3,000 / month) = $600 / month pension

Worker doesn't have to contribute or manage money

Employer is responsible for meeting promised obligation

Why defined benefit plans are disappearing

Traditional pensions are large burden for employer -- especially small employers

Other savings vehicles (401(k), IRA) became available in the 1980s

A short history of defined benefit plans and the PBGC

ERISA (Employee Retirement Income Security Act) passed in 1974 after bankruptcy of automaker Studebaker and insolvency of its pension plan

ERISA establishes rules for management of pensions

ERISA sets up PBGC (Pension Benefit Guarantee Corp.)

PBGC currently insures 67,000 defined benefit plans covering 41 million workers

Company plans must pay insurance premiums to PBGC

PBGC doesn't cover small plans with fewer than 25 employees

PBGC doesn't cover medical benefits

PBGC only insures a maximum of $2,200 in monthly pension benfits

How to check on your plan's health

Labor Department and IRS generally only audit the largest pension plans

Most of the 670,000 small pensions are not audited by the government

Qualified plans are required to provide disclosure to employees

Must provide summary plan document which describes plan

Must provide summary of annual report for plan

Must provide annual individual benefit statement

Shows how much you might get from the plan if you continue working

Plan must provide IRS Form 5500-C/R if requested

Employers and plan managers must manage plan for benefit of employees, but check your plan to ensure self-dealing isn't going on

Dangers to public employee pensions

Federal employee pension funded has unfunded liability of $1.4 trillion

It's true that the federal government shouldn't go bankrupt because of its power to tax, but no private company would be able to keep its books like the government

Pensions for federal, state and local government employees are not covered by ERISA

Many local government pensions are seriously underfunded

If your plan is underfunded, start saving through a savings plan