By Kathleen Day
Washington Post Staff Writer
Sunday, September 17, 2006

Sean Schuback, a 15-year veteran of Verizon, arrived at work one morning last December to unsettling news: A company e-mail sent the night before announced that the telecommunications giant was freezing its pension plan.

In a instant, Schuback, 33, who joined the company as a phone operator right out of high school, saw the $469,286 pension payout he was told he could receive by working another 15 years sliced to $245,494, where it would stay no matter how many more years he put in.

"When I started, I thought, 'This is just a job for a while,' but the benefits were so good I stayed," said the Eastchester, N.Y., resident, who worked his way up to a managerial position. Now, his plan to retire early at 48 and work part time is dashed.

What happened to Schuback's pension is part of a long-running trend, as otherwise healthy companies -- not only Verizon Communications Inc., but also International Business Machines Corp. and, most recently, DuPont Co. -- freeze, terminate or alter the terms of their employees' retirement packages. Most of these companies increased other retirement offerings, which don't include fixed payouts.

Today, about 22 million workers, 19 percent of active private-sector employees, have traditional pension plans, compared with 39 percent three decades ago, according to federal government statistics.

Despite Schuback's financial setback, any retirement expert would say that Schuback should count his blessings as one of a dwindling number of U.S. workers who have a benefit that many say is quickly becoming a dinosaur.

"There's no doubt, if you have some guaranteed retirement from your employer, you are definitely in the lucky minority," said Jack VanDerhei, a professor in the business school at Temple University and a research fellow at the nonprofit Employee Benefit Research Institute.

He and other financial experts say workers fortunate enough to still have traditional pensions should not rely on them too much for retirement, as the long-term prospects of such plans are increasingly in doubt. While a new law signed last month by President Bush aims to shore up the private pension system by forcing companies to fund their plans more fully, some retirement consultants say the added expense may the trend of companies limiting their plans for existing employees or dropping them for new hires.

As workers make their retirement calculations, they should keep in mind the two, sometimes opposing, principles that govern the U.S. pension system and that the new law, the Pension Protection Act, reaffirmed: An accrued pension can't be wiped out, but companies can walk away from promised future benefits at any time.

That means workers who still have pensions will have to do more homework to determine how much money their plans are likely to provide, experts say. And they should be prepared for the worst-case scenario.

"It's always wise to cast a jaundiced eye on a pension and ask what happens if it doesn't deliver as promised," said James McGrath, a financial planner in Rockville.

The traditional pension, also known as a "defined-benefit plan," is typically funded entirely by the employer and offers a steady monthly income, or a lump sum, upon retirement, based on a person's age, salary and years of service. Pension benefits typically accrue most of their value in the last few years of a 20- to 30-year employment cycle. Employers bear the risk and burden of properly investing the pension's funds to ensure full payout of promised benefits.

The costs of maintaining such plans have climbed sharply in the past six years because companies have been forced to put more money into pensions to compensate for lower-than-anticipated returns on investments stemming from low interest rates and declines in stock market values, said Matt Moore, senior analyst at the National Center for Policy Analysis, a nonpartisan think tank in Dallas.

As a result, employers are increasingly embracing other options, especially "defined-contribution plans," the most common of which is the 401(k). Under such plans, companies contribute a set amount each month, ask employees to bear the responsibility of deciding how that money will be invested and then hand over a check at retirement for whatever each account is worth at that moment. In 1978, only 17 percent of the workforce had a defined-contribution benefit. By 2003, the latest numbers available, it was 56 percent.

A smaller number have converted pensions to "cash-balance plans." They work like a pension because a worker gets a specified amount at retirement, but also like a 401(k) because the company puts in a set contribution for each worker -- regardless of age or seniority -- and specifies how the money will increase in value, for example at 1 percent above the interest on 10-year Treasury note. Thirty years ago, no pension plan had been converted to a cash-balance model. Today, an estimated 5.5 million people have converted to a cash-balance program.

Cash-balance plans appeal to a younger, more mobile workforce for two reasons, said J. Mark Iwry, a lawyer who is a senior fellow at the Brookings Institution and a one of the co-founders of the nonprofit Retirement Security Project. Benefits accrue steadily rather than accelerate sharply after a worker has been at one company for 20 or 30 years. And they are portable: Workers can take what they've accrued when they change jobs.

Those shifts mean that some workers with pensions have the added benefit of a second plan, such as a 401(k), though VanDerhei said that no one knows exactly how big the overlap is. Even so, a sudden drop in the future value of a person's traditional pension can change the retirement picture. Workers have only three options to close or at least narrow the gap between what they thought they would get and what they will get, financial planners say: Postpone retirement and work longer, save more to make up the difference, or accept a lower standard of living in retirement.

The good news for workers with traditional pensions, retirement experts say, is that most plans are fully funded and will probably pay out as expected. And even if a plan isn't fully funded -- which means the employer has not set enough aside to pay all promised benefits -- there is a federally run safety net called the Pension Benefit Guaranty Corp., which ensures that workers owed a pension get at least something. If a firm goes into bankruptcy protection and is permitted under its reorganization to dump its pension, the PBGC will pay retirees a portion of what they are owed, up to an inflation-adjusted maximum of $47,659, for those who leave the workforce at 65.

Except for well-publicized instances, such as in the airline industry -- where pilots and others at carriers under bankruptcy protection have had to take a cut from the six-figure retirement packages they were owed -- 90 percent of workers paid by the PBGC get 100 percent of what they were due, said PBGC spokesman Randy Clerihue.

The bad news, though, is that no one can bank on a pension benefit continuing to grow as originally promised. So while many private-sector retirement experts say pension holders have many reasons to justify hoping for the best, they recommend preparing for the worst.

Pension holders should have sound estimates of how much they will need during retirement and how much they can expect from their pension, Social Security and personal savings, including 401(k)s and IRAs. Financial planners can help calculate that number and offer advice on how to adjust savings, if necessary. Internet-based retirement calculators are also available on the Web sites of many mutual fund companies and securities firms and some nonprofit consumer groups.

Retirement experts say workers often underestimate what they need. A paper published last week by EBRI concludes that an old rule of thumb that retirees need 75 percent to 85 percent of their pre-retirement income to live comfortably is outdated. A person today probably needs closer to 100 percent, said VanDerhei, the paper's author, because people are living longer and they need to include money for health care not covered by Medicare.

Workers also should check the financial health of their company's plan. The new law requires employers to send workers regular pension statements in plain English -- without misleading accounting tricks -- but not until the end of April 2009, according to the ERISA Industry Committee, a trade group representing the nation's biggest employers on benefit issues. Until then, workers will have to put in extra work to get a clear picture of their pensions. They should contact their company's benefits department for information, though it may be hard to decipher the numbers, retirement consultants say. Employees concerned about their company's plan might consider pooling resources to hire an outside pension consultant to analyze the data.

Clerihue, the PBGC spokesman, said workers also should remember that a fund that looks healthy today, even under the stricter requirements of the new pension law, can quickly fall behind, depending on the economy's, or an industry's, health. He said that in 2000, using an agency calculation that is more conservative than what most companies use, the PBGC had a $23 billion shortfall for about $1.3 trillion in owed pension benefits. Within three years, however, the underfunded amount had grown to $450 billion of $1.6 trillion owed.

Underfunded plans, even at a healthy company, are more likely to be frozen, financial experts say. The benefits consulting firm Watson Wyatt Worldwide Inc. said that last year, 113 of the 1,000 biggest companies in the United States had frozen or terminated a pension plan or had announced plans to do so, nearly double the number in 2004 and 2003 combined.

"If it's not being funded currently, you can expect problems sooner or later," said McGrath, the Rockville financial planner. "If it's healthy, you still need to see how well prepared you'd be if the pension were frozen today, in a year, in five years. It all depends on how old the worker is."

Pensions freezes can happen two ways, said Karen Ferguson, director of the Pension Rights Center, a nonprofit advocacy group. In a "soft freeze," benefits continue as usual for existing employees, but the pension is closed to new hires. In a "hard freeze," such as the one Schuback experienced at Verizon, everyone is affected.

Younger workers stand a greater chance of not getting all they were hoping to get from their pensions. But they have the advantage of having more years to work and save to make up for shortfalls under various scenarios, planners and other experts say. For example, the $223,792 drop in potential value of Schuback's pension isn't as devastating, largely because he's relatively young. And the $245,494 he is on track to get puts him way ahead of many of his peers: It's more than six times the average, $40,000, most people in their thirties have saved, according to EBRI.

Older workers are more likely to have accrued much of their pension benefits. But they will have less time to save for any shortfalls. Financial planners say this group should take full advantage of catch-up programs that allow workers over 50 to put more pretax money into 401(k)s and IRAs.

By assuming a worst-case scenario and bolstering personal savings to compensate, the worst that can happen, McGrath said, "is that you'll retire with too much money. Is that bad?"

Workers within a year or two of retirement who have worked at a company long enough to have locked in full benefits might find they can invest a bigger slice of their savings in stocks than conventional investment wisdom advises for older investors. For example, if a soon-to-retire worker has accrued a pension benefit of $50,000 a year, he might want to take a few bigger risks with other income -- investing in equities rather than bonds, for example, which could help a retiree stand a better chance of keeping up with inflation, McGrath and others said.

Those retiring should take special care when deciding whether to take a lump sum or monthly payments, experts say, because the interest rate companies can use to compute lump-sum payments can disadvantage a worker.

But no advice can help some older employees who have not locked in the full benefits of working two or three decades and did not factor in the possibility that their pensions would be curtailed. For this group, financial consultants say, a freeze or termination amounts to a pay cut. Verizon network services manager Margo Bryerton, 57, who has worked at the company for 18 years, estimated that the freeze lopped $300,000 from the retirement package she expected when she retires at 65. Now, she said, she will have to work past 65, take a second job or possibly sell her house to make up the difference.

"I based everything on faulty thinking. I assumed it would be there," she said. "I'm in that age group where I'm too young to retire but I'm too old to start over. It really is a pay cut for me."