10 Things Pension Plans Won't Tell You

10 Things Pension Plans Won't Tell You

SmartMoney.com
September 13, 2011

1. "We're disappearing."
   
   Not long ago, many jobs came with a pension -- monthly checks paid upon retirement for the rest of an employee's life. But nowadays, workers frequently switch jobs and companies are struggling to cut costs, and the generous defined-benefit plan, or classic pension, is increasingly being replaced by defined-contribution plans like the 401(k), which employees pay into. In 1975, 62 percent of private-sector workers participated solely in a defined-benefit plan; in 2009, only 7 percent did, according to the Employee Benefit Research Institute. But many wonder whether defined-contribution plans are an adequate substitute.

   "They don't provide near the level of retirement security that traditional defined-benefit plans have been able to provide," says David Certner, legislative policy director for AARP.

2. "You may not be getting as much as you thought."
   
   Even solid companies may legally change the terms of their pension plans so that retirees get less than originally agreed to -- and they aren't always straightforward about it. In 2001, after Cigna converted its defined-benefit plan (specifying a monthly payment in retirement) into a cash-balance plan (which uses a less reliable benefits-accrual formula), 25,000 employees sued the company over the change, claiming it offered less generous benefits but that "misleading" plan summaries made the terms sound better than they actually were. The case reached the Supreme Court, which ruled in May that the district court -- which initially found Cigna in violation of the Employee Retirement Income Security Act -- "revisit its determination of an appropriate remedy for the violations."

   While both sides declared victory, the decision "opens up a world of remedies that were previously thought to be unavailable," says Rebecca Davis, a lawyer for the Pension Rights Center, which counsels people on claiming pensions.

   Cigna says it's "pleased" the district court will have to "reconsider its initial decision" ruling in favor of plan participants.


3. "We sometimes gamble with your money."
   
   If you think companies always play it safe when investing pension plan assets, you're wrong. For example, according to the Government Accountability Office, more than half of pension plans today invest to some extent in hedge funds; in fact, a survey of the largest pension plans found they invested 55 percent more assets in hedge funds in 2010 than they did in 2009. Why take the risk?

   Since pension plan assets decreased by 23 percent in 2008, plan sponsors are "trying to play catch-up," says Susan Mangiero, a pension-risk strategist. And sometimes it pays off.

   The California Public Employees' Retirement System, the nation's largest public pension fund, has benefited from investments in Groupon and Skype through private-equity firm Silver Lake. But plans should properly vet the risks of less-than-conservative investment choices.

   Otherwise, "what they're really doing is buying more problems," Mangiero says.

4. "When we don't pay our bills, you do."
   
   Pension plans rarely hold enough to cover the benefits of all participants. But while private-sector companies must keep plans above certain funding levels, public-employee plans have no such rules. A Pew Center on the States study found the gap between what states owe in retirement benefits and what they have in their coffers stretched to $1.26 trillion in 2009 -- a 26 percent widening since 2008.

   "If they continue on that path long enough, the funds could eventually run out of money," and taxpayers may have to pick up the tab, says Josh Barro, a senior fellow at think tank Manhattan Institute.

   About to default on its pension obligations, the city of Central Falls, R.I., declared bankruptcy in August, but not before raising taxes to the state's maximum. In fact, a study by the Institute for Truth in Accounting found that Rhode Island taxpayers would each owe $12,000 toward covering the state's pension debt. Rhode Island's general treasurer says in a statement that the state is currently working on reform to spare taxpayers.


5. "We toyed with taxpayer money..."
   
   A decade ago, many politicians, riding a soaring market, promised pension "sweeteners" that states couldn't afford -- which experts now say will lead to higher taxes.

   "It's just a promise that goes on the books, and you get to send the bill to taxpayers 10 or 20 years in the future," says Barro.

   For example, New Jersey raised pension benefits in 2001 by more than 9 percent yet failed to replenish the fund. ("It was an election year," says a spokesperson for New Jersey's Treasury Department; to increase plan funding, the state passed legislation this year requiring state employees to pay more.) To make ends meet, many states are turning pension obligations into bonds and selling them. In 2010, local governments issued nearly $10 billion in pension bonds, according to Municipal Market Advisors. But critics say it's just swapping one debt for another.

   "It's like balancing your home budget by not paying your mortgage," says Sheila Weinberg, CEO of the Institute for Truth in Accounting.

6. "...which is why we want you to pay more."
   
   One possible solution to funding pension plans is to have employees pay more, like New Jersey did. Indeed, 15 states raised employee contributions to public pension funds in the first six months of 2011, according to the National Conference of State Legislatures. Retirees and union officials have railed against the hikes, saying workers shouldn't have to take a pay cut to get what they're owed.

   "Basically what you're doing is taking away people's pensions in violation of their contracts," says Paul Secunda, visiting professor at the University of Wisconsin Law School.

7. "Our mistakes can end up your problem."
   
   In 2007, six years after her husband died, Ruby Card was expecting her regular pension check of about $1,400 for her husband's longtime service as a postal worker. Instead, the U.S. Office of Personnel Management told the Bowdoin, Maine, resident there had been a mistake: She had been overpaid by a total of more than $20,000. The agency said it would reduce her check by 24 percent and withhold an extra $400 a month for almost five years.

   "It was totally devastating," Card says.

   Turns out, Card's story isn't uncommon. OPM reported nearly $238 million in improper retirement payments last year. Still, the Government Accountability Office says OPM has an error rate of less than 1 percent.

   A mistake "does not create entitlement to the erroneous payment," the agency says.

   But retirees and their advocates question why pension recipients are on the hook for a debt they weren't expecting.

   "The plan should have some level of culpability," says Davis, of the Pension Rights Center.

8. "We may owe you money..."
   
   Many firms have no means of finding former employees who never claimed their pension. Instead, the funds might get rolled into "missing-participant IRAs," provided by the likes of Fidelity and PenChecks' National Registry of Unclaimed Retirement Benefits, which holds some $200 million in unclaimed pensions. There's also the Pension Benefit Guaranty Corp., which takes over beleaguered plans and has $265 million owed to those from terminated private-sector plans. The problem, experts say, is there's little incentive to match money with claimant. How many people are affected? Peter Preovolos, CEO of PenChecks, says there are currently about 100,000 names in his company's national registry alone.


9. "...but you might have to jump through hoops to get it."
   
   If you're trying to claim benefits from an old pension, you know it can be hard. As companies merge or fold, documents can get lost, or maybe the old HR department doesn't exist anymore.

   It can be "a total meltdown of information," says benefits attorney Jason Sheffield.

   Although PenChecks periodically conducts Internet searches to find funds' rightful owners, only 5 percent get located each year. And there are sometimes barriers to claiming a pension once it's found: If claims are repeatedly denied, participants can sue, but lawyers' fees are often prohibitively expensive. Because of many such obstacles, the Administration on Aging funds free pension-counseling projects serving 29 states, including the Pension Action Center (pensionaction.org) and Pension Rights (pensionrights.org), which help people locate lost pensions, claim them and hold on to them in cases of recoupment and other threats.


10. "Some employees are double-dipping."
    
    Some states, like Nevada and Rhode Island, allow public employees to retire and collect a pension, then get rehired -- so they receive a salary and a pension at the same time. Defenders of the practice claim it's necessary for workers in jobs where there's a "critical labor shortage." But critics contend it drains states' already low pension pools. In Nevada, for example, nearly 700 state workers have collected salaries and pensions at the same time, according to one report. This double-dipping cost the state's retirement program more than $54 million between 2001 and 2008, the state legislature found. The National Institute on Retirement Security identifies cutting down on such abuses as a key trait of strong pension plans.

    "It's really a matter of treating everyone equally," says Diane Oakley, the institute's executive director.

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