Protect Your Pension

by Rick Rodgers

The Pension Protection Act of 2006 (PPA) just turned five years old. As companies rush to shore up pension or cancel underfunded plans you need to protect yourself from common pension mistakes. PPA was designed to close loopholes in the pension system and addresses problems for the roughly 34 million Americans covered by traditional pensions known as defined-benefit plans.

PPA requires pensions be fully funded by 2015. It also prevents companies with big pension deficits to skip annual contributions and still pronounce their plans healthy. Another major goal of the bill was to shore up the health of the Pension Benefit Guarantee Corporation (PBGC).  PBGC is an agency of the US government that insures private pension plans.  147 pension plans failed in 2010 which increased the PBGC deficit to $23 billion. The agency assumes terminated plans and pays benefits to retirees up to a maximum of $54,000 if they retire at age 65 or later.

One problem not addressed by PPA but continues to affect millions of people of all ages, not just retirees are pension miscalculations.  Anytime you change jobs or take a lump-sum pension cash-out, you are at risk. Women are especially vulnerable to pension mistakes because they tend to move in and out of the workforce more often than men. For the most part, pension mix-ups aren’t intentional.

How would you know if there was an error which had been compounding for many years? How can you ensure that you’ll get what’s rightfully yours when retirement arrives? It’s up to you to keep track of your own pension. Know your rights and monitor your retirement plan before the “golden years” creep up on you.

Educate yourself about how your plan works. Contact your company benefits officer and ask for a copy of the plan, not the summary plan description.  In May, the US Supreme Court ruled that you can’t depend on your employer’s summary plan description.  The summary is an abbreviated form of the plan.  The Court held that if there are discrepancies, the plan is the controlling document.  You need a copy of the plan to determine how your pension is calculated.  The plan document can run 50 pages or more.

More and more companies are freezing or terminating their pension plans.  Only 38% of Fortune 1000 companies offered a pension plan in 2010.  That number is down from 59% in 2004.  Of those companies with a plan, 35% of those were frozen and 2% were in the process of terminating the plan.  You should immediately request a personal statement of benefits if this happens to your pension.  The statement will tell you what your benefits are currently worth and how many years you’ve been in the plan. It may even include a projection of your monthly check.

Most of the time companies won’t intentionally fudge; sometimes the blame can be on simple errors. Here are seven common pension mistakes to watch for:

1. Company forgot to include commission, overtime pay, or bonuses in determining your benefit level.
2. Your employer relied on incorrect Social Security information to calculate your benefits.
3. Somebody used the wrong benefit formula (i.e., an incorrect interest rate was plugged into the equation).
4. Calculations are wrong because you’ve worked past age 65.
5. You didn’t update your workplace personnel officer about important changes that would affect your benefits such as marriage, divorce, or death of a spouse.
6. The company neglected to include your total years of service.
7. Your pension provider made a mathematical error.

How do you protect yourself?  Create a “pension file” to store all your documents from your employer. Also keep records of dates when you worked and your salary, since this type of data is used by your employer to calculate the value of your pension. Ask for professional help, if you still think something might be wrong.  The American Academy of Actuaries Pension Assistance List program offers up to four hours of free help from a volunteer.  The federal administration on Aging’s Pension Counseling and Information Program may also be helpful. 

About Rick Rodgers
Rick Rodgers, Certified Financial Planner, Chartered Retirement Planner Counselor, Certified Retirement Counselor, and member of the National Association of Personal Financial Advisers, is Founder and CEO of Rodgers & Associates. Rick’s expertise in the investment and financial advisory profession began with one of the big Wall Street firms in 1984. Twelve years later, he founded Rodgers & Associates as a way to concentrate on financial planning. His vision was to help families prepare for a worry-free retirement through the creation and conservation of their wealth. Today, as a leading retirement expert and personal wealth adviser to high net worth individuals, Rick provides integrated financial, tax, and investment strategies, retirement planning, executive compensation, estate and charitable planning. He is also author of the book The New Three-Legged Stool: A Tax Efficient Approach To Retirement Planning (www.TheNewThreeLeggedStool.com)