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The latest blow: Smaller payouts for new retirees

By Laura Cohn
Sunday, May 16, 2010; G03

When Ken Hollis finished college in the mid-1970s, he accepted a job with the division of General Motors that made auto parts and worked there for 23 years. When the division was spun off as Delphi, workers were told that their pensions would carry over to their new employer, Hollis says. So he stuck it out and worked for Delphi for nine more years.

Although Delphi filed for bankruptcy in 2005, Hollis thought his benefits would be protected. And even when he was forced into early retirement nearly two years ago, at age 54, as a result of the downturn in the automotive industry, he didn't worry.

He should have.

Early last year, Delphi announced that it was terminating health- and life-insurance benefits for retirees. Then GM filed for bankruptcy, jettisoned the pension plan it managed for Delphi's white-collar retirees and turned the plan over to the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pensions. If a company's pension plan becomes underfunded and the company cannot make up the shortfall, the agency takes over and continues to pay retirement benefits up to the limits set by law, which are adjusted each year. In mid-February, Hollis was notified that his monthly pension payment would shrink by 38 percent, or more than $1,100 a month.

For plans taken over by the agency in 2010, the benefit cap for workers who retire at age 65 is $54,000 a year. Those who retire younger, such as Hollis, get less. "I worked according to the rules," Hollis says. "Now that the game is over, they've changed the rules."

A growing trend

Hollis is not alone. For many of the 15 percent of private-sector workers covered by defined-benefit plans, the guaranteed pension is no longer guaranteed. Because of the 2007-09 stock-market collapse and the inability of some recession-scarred companies to sufficiently fund their pension plans, the agency took over 129 plans last year -- a 74 percent jump from the year before.

And 2010 is shaping up to be even worse. Through the first six months of the agency's current fiscal year, it took over 85 plans. It has taken over so many plans with looming obligations to future retirees that its own deficit approached $22 billion last year.

Even companies that aren't filing for bankruptcy -- including some of the best-known names in corporate America, such as Kimberly-Clark, the maker of Kleenex, and 3M, which manufactures Post-it notes -- have trimmed their pension obligations for employees or new hires.

More than 100 major companies have shut their pension plans to new workers, frozen benefit accruals for current employees or terminated their pension plans since 2006, according to the Pension Rights Center.

What's the take-away for the average American worker? If you are counting on your traditional pension to cover your expenses in retirement, you might need a backup plan.

The onus is on employees to fill the gaps created by employer cutbacks. They are more likely to be affected by pension cutbacks than most younger workers, who were never covered by defined-benefit plans. If you're 50 or older, you can take advantage of catch-up contributions that allow you to stash up to $22,000 in your 401(k) or similar employer-based retirement plan in 2010 -- $5,500 more than younger workers.

The breakdown

The wreckage piling on top of workers is only partially the result of the recent economic downturn. For years, some companies failed to squirrel away enough cash to pay the obligations they promised to current and future retirees. Those low contribution levels were further compounded when the stock market tanked.

This year, corporate pension plans will have enough cash in their accounts to cover only 92 percent of their obligations, on average, down from 111 percent in 2009, according to Mercer, the workplace-consulting giant. Even more worrisome is that more than one-third of the plans Mercer surveyed have funding ratios below 80 percent -- a crucial level that can trigger restrictions on lump-sum payouts to new retirees. To get their plans back on track, Mercer estimates that companies will have to contribute 400 percent more cash this year than in 2009.

Payout restrictions

Your plan's funding level could affect your payout choices. If your plan offers a lump-sum payment option and it is less than 80 percent funded this year, you will be allowed to take only half of the benefit as a lump sum. The balance will be paid in monthly installments or as a deferred lump sum when the plan is at least 80 percent funded again. If your benefit is worth less than $5,000, you may still take a lump sum.

If you are planning to retire with a lump sum in 2010 (and your company wasn't restricted in April), submit your paperwork well before the Oct. 1 deadline. "If your plan is close to the edge, make sure you get paid your lump sum by early to mid-summer," says Ethan Kra, Mercer's chief retirement actuary. Once a plan is deemed to be under 80 percent funded, payout restrictions kick in immediately.

The worst-case scenario: A company's pension plan drops below 60 percent funded, barring new retirees from receiving any lump sum (until the plan regains its footing) if the value of their pension benefits exceeds $5,000.

-- Kiplinger's Personal Finance

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