Unless you have a guaranteed, fixed-rate annuity or
target-date fund in a 401(k), you needn’t worry about your retirement funds,
right? Wrong. You do need to worry, but you also need to be vigilant.
According to a recent study by the Center for Retirement
Research (CRRC) at Boston College, if you’re in a multi-employer
defined-benefit plan — an old-style pension for some 10 million workers that
pays a fixed monthly amount at retirement, you should be concerned about the
plan’s funded status.
Simply put, the more underfunded a pension plan is, the
more likely it’s going to run out of money. There are several reasons for a
plan being underfunded, but mostly it’s due to how the pension fund is managed.
Is the fund diversified enough to weather downturns in the stock market? Are
the contributions enough to cover everyone in the plan in the future? These are
rarely easy questions to answer.
The CRRC study found that “while most multiemployer
pension plans are finding their financial footing, a substantial minority face
serious problems…the key reason is a declining financial base, which results in
negative cash flow.”
That means that fewer employees are contributing to the
plan while returns on the investments within the fund aren’t keeping up with
performance in the past.
Although most plans are safe, the CRRC estimates that “a
simple model suggests that one third of ‘critical’ plans could exhaust their
assets within 30 years.” That’s not good news if you’re in one of the most
poorly funded plans.
Fortunately, under federal law, pension managers must
inform you if your plan is seriously underfunded. You can monitor the status of
your program every year and, in many cases, put pressure on your union
representatives or other employee groups to take action to improve the finances
of your pension.
The government has different warning labels for pension
plan underfunding. Here’s their alert system:
* Critical. This is code red for pensions, meaning
that your plan is less than 65% funded and faces either a funding shortfall in
the next five years or insolvency within five to seven years.
* Severely Endangered. The next level down, this
translates into less than 65% funding and a shortfall within seven years.
* Endangered. This is akin to a yellow alert,
meaning the plan is less than 80% funded and will face a shortfall within 7
years.
Which plans are on these lists? If your plan is in
trouble, you should’ve been notified. If not, you can go to this Department of
Labor site.
Here’s a sampling of the most recent underfunding
notices:
2014 Critical Status
Notices
2014 Endangered Status Notices
How to Take Action
What can you do if your pension is on the critical or
endangered list? Here’s what the DOL says about these notices:
“If a plan is in critical status, adjustable benefits may
be reduced and no lump sum distributions can be made. Pension plans in critical
and endangered status are required to adopt a plan aimed at restoring the financial
health of the pension plan.”
Those endangered or critical plans that are identified by
the DOL have to submit a plan to improve their funding, so in most cases
there’s not much you need to do. Still, this is something you should know and
become proactive about with your employee representatives and plan
administrators.
In any case, plan managers must report the funding status
of your plan every year to the U.S. Department of Labor and the Pension Benefit
Guaranty Corp. — and you. If you’re not getting the information you need,
contact the DOL at www.askebsa.dol.gov or by calling toll-free 866-444-3272.
Source: Forbes
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