Money/Finance - Pension
Pensions
Understanding your pension benefits: what, when and how, even before you are eligible to collect anything, is key to advancing smartly into your retirement years.
Basic Terms
To understand your pension rights, you need to understand the differences between types of pensions, and which pension(s) you are eligible to receive. The two major types of pensions are Defined Benefit Plans and Defined Contribution Plans. More recently, employers are contributing to funds that are treated as a pension-like benefit to the employee, but are not covered by the same laws and protections that apply to pensions. These newer versions of employee benefits are Tax Deferred Annuities, 401(k) or 403 (b) plans, profit sharing plans, or stock option plans.
Defined Benefit Plans are pensions in which the plan sets out how much the pension will pay the retiree. Because the benefit is fixed, the amount the employer and employee pay into it each year changes depending on the current rate of return on investments and the number of retirees participating in the plan. The risk of having too low a rate of return or more retirees than expected stays with the employer. Because the benefit is set, the company will need to put more in the plan to make sure the set benefit is paid. Due to an inability to keep these plans properly funded, there has been a major shift by many companies away from these and into various types of defined contribution plans.
Defined Contribution Plans are those where the employer (and employee) have a set amount paid into the plan each year. The pension benefit paid out to retirees is not set, but depends on the investments made with the contributions. In this case, the risk of too low investment stays with the retiree. If the investment return was not as high as expected, the monthly benefit at retirement will be lower.
Both of these plans must meet the requirements of the Employee Retirement Income Security Act (ERISA), a federal law, passed in 1976, that governs private pensions. One of the ERISA requirements is that an employer must offer you information about your pension, in a document called the Summary Plan Description. This must be sent to you within 90 days of your request to the Pension Plan Administrator. The Summary Plan Description will tell you the key information about whether it is a defined benefit or defined contribution plan, when you are entitled to receive the pension, how the benefit is calculated and how it will be paid to you -- monthly or in a lump sum.
Vesting
An important part of understanding pension benefits is understanding vesting rights. Vesting means having the right to receive the pension at retirement age, even if you no longer still work for that employer. Understanding vesting is particularly important for women workers who traditionally have moved in and out of the work force. Between 1976 and 1989 vesting usually took 10 years. Based on changes in the ERISA law, as of 1989, most employees vested after 5 years working with the employer. Beginning in 2002, there are two basic vesting schedules. Under the three-year schedule, workers are 100% vested after three years of service under the plan. The six-year graduated schedule allows workers to become 20% vested after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years of service. Plans are allowed to have faster vesting schedules. If you worked for a company before 1976, there were no ERISA rules limiting the number of years before you vested. It was possible to have a pension plan where you did not vest if you did not work for the employer right up to retirement.
[Back to Top]Survivors' Benefits
Another key protection that came with ERISA amendments in 1984, is the right to survivors’ benefits unless refused in writing by both spouses. Joint and survivor benefits from a pension plan means the non-employee-surviving spouse is still eligible for a pension benefit after the retiree's death. The couple can choose to take a higher pension benefit during the retiree's lifetime, instead of the lower joint and survivor benefit paid until the death of both. Because most women live longer than men do, choosing the joint and survivor benefit usually benefits the non-working wife. Before 1984, the worker could make this choice without consulting his spouse. After 1984, both people must refuse the joint and survivor option for it to be binding on the survivor.
Integration of Pensions and Social Security
To clearly understand your pension benefits rights, you also must check if the estimated benefit is correct. Particularly women, who have not stayed in the paid work force full time, are at risk of losing pension benefits because of integration with an erroneously high SSA benefit estimate. In the pension world, integration is an employer credit for amounts paid into the Social Security system as employer FICA taxes. Employers are allowed to use FICA payments to count towards pension benefits under ERISA. As of 1989 a company is limited to setting off no more than 50% of the pension, but for years prior to 1989, up to 100% of the pension could be set off by employer FICA payments. Approximately half of retirees covered by private pensions have an integration clause in their pension, resulting in pension benefits being reduced. Because integration uses an estimate of how much of a retiree's Social Security monthly benefit is attributable to any one employer’s FICA payments, estimates for workers with higher than average number of jobs over a career, and shorter stays in each job are more likely to have the Social Security estimate incorrectly high. Because older women workers often fit this profile, they are most often hurt by an incorrectly calculated benefit from the integration clause.
Places to go for help to determine if your pension is being shorted by integration are:
Pension and Welfare Benefit Administration
U.S. Department of Labor
Chicago Regional Office
(312) 353-0900
(Counseling and assistance)
AARP Pension Equity Project
601 E. St. NW
Washington, DC 20049
(800) 424-3440
Pension Rights Center
Washington, DC
(202) 296-3776
Pensions are a complicated topic, but understanding your rights and benefits are crucial for advancing smartly. More information on pension benefits is available from the federal departments responsible for regulating pensions, the Pensions and Welfare Benefit Administration (PWBA) and the IRS. A number of brochures, like the following, are available by calling the PWBA brochure hotline at (800) 998-7542:
- Reporting and Disclosure Guide for Employee Benefit Plans
- Guide to Summary Plan Description Requirements
- What You Should Know About the Pension Law
- How to File a Claim for Benefits
- How to Obtain Employee Benefit Documents from the Labor Department
You can also receive the following free publications by calling the IRS at (800) 829-3676, and ask for the Publication by number:
- Looking Out for #2: A Married Couple's Guide to Understanding Your Benefit Choices at Retirement From a Defined Contribution Plan (Publication 1565)
- Looking Out for #2: A Married Couple's Guide to Understanding Your Benefit Choices at Retirement From a Defined Benefit Plan (Publication 1566)
The Michigan Pension Rights Project (1-866-735-78737), operated by the Legal Hotline for Michigan Seniors, can answer questions about your pension and offer assistance, on a case by case basis, in obtaining benefits to which you might be entitled.
