Protecting Your Defined Benefit Plan
Question: I'm a 20 year employee of a company that has a defined benefit plan. I've been told I am fully vested and am thinking about retiring soon. Are my benefits insured or guaranteed and what can I do to protect them?
Answer: You ask a very good question. The short answer to your question is that your defined benefit plan is partly insured. A defined benefit plan is a kind of retirement plan that promises to pay you a specific monthly benefit for life. For example, a defined benefit plan might pay 2% for each year of service times the average of your highest three years of compensation. So if you worked for 20 years and your highest three salary years averaged $30,000, you could receive $12,000 per year at retirement (20 x 2% x $30,000 = $12,000).
Most private defined benefit plans are insured by the Pension Benefit Guaranty Corporation (the "PBGC"). The PBGC is a federal government agency. It acts much like the FDIC that insures bank deposits. But like FDIC insurance, your protection is limited. If a pension plan fails and is terminated, the PBGC insures only part of the promised benefit. The amount of protection depends on when the plan ends. The maximum amount of protection changes every year and is dependent on several factors including the age of the retiree and the form of benefit. Most single employer pension plans would be fully insured. Multi-employer plans that often cover union members who work for a number of different employers in various trades, such as electrical, carpentry and trucking, also carry a PBGC guarantee but for a much smaller amount than for a single employer plan.
Defined benefit plans usually fail because they are underfunded. This means there is not enough money in the plan to pay the benefits that have been promised. This can happen when the plan's investments perform badly such as during the stock market crash of 2008.
The safety of your benefits depends on the health of your plan. The health of the plan depends on the amount of company contributions and the return on plan investments. It is essential to know the health of your plan so you can make informed retirement decisions.
To find out if your plan is healthy and adequately funded, the first step is to gather information. You can ask your plan administrator for a copy of your pension plan's most recent annual report summary. You can also obtain a copy of IRS Form 5500. You can get Form 5500 from your plan administrator, at www.freeerisa.com or from the U.S. Department of Labor.
For additional information on safeguarding your interests, see Protect Your Pension - A Quick Reference Guide available from the Department of Labor or on their website at www.dol.gov.
If you have questions or need help with your pension, you should contact the Upper Midwest Pension Rights Project at 800-992-8161.
Iowa Legal Aid provides help to low-income Iowans.
To apply for help from Iowa Legal Aid:
- Iowans age 60 and over, call 800-992-8161.
- Apply online at iowalegalaid.org