July 2009 Archives
Recent legislation mandates that employers who sponsor defined benefit (pension) plans now send out an annual notice about the current financial health of their plan. The Pension Protection Act of 2006 (PPA) provides workers with information that is useful in looking forward to and planning for retirement. If you work for a company that provides a pension, generally you have to work for a length of time in order to be "vested" in the plan. For example, my son is a county employee. If he works at least 5 years for the county, the counties "promised" contributions toward his retirement are locked in or vested. His contributions are guaranteed from the beginning of his employment. some plans have a graduated vesting schedule where each year that you work a certain percentage of your employers benefits are vested. For example after year 1 20%, year 2 40% and so on up to the 100% vesting date.
In addition to the vesting schedule, you should also be aware of the various payout options your plan provides. In my case, because I have worked at other places with larger retirement balances, I intend to start taking distributions from this particular plan at the age of 55 but while I am still employed elsewhere. Because these benefits were never taxed, they will be fully taxable and I do need to take into consideration my other sources of income and if this extra will move us into a higher tax bracket.
But let's get back to the Dear Plan Participant letter. For one thing, I moved and failed to notify my previous employer of my new address so they had a little difficulty getting this notice to me - POINT - when you move, notifying past employers who have retirement benefits waiting for you is a great idea!
The letter goes on to inform me about the health of the entire pension plan, how the money is invested and other important details. For my particular plan 683 current employees, past employees and retirees should expect to receive a total of $17,250,000 if they all chose to take their money and run as of December 31, 2008. This is called the plan's liabilities and are based on actuarial assumptions. At that same time, the assets in the plan were worth $12,000,000. In other words if the plan cashed out, the account balance would only provide for 70% of the plans obligations. Since that time the stock market has rebounded and I could guess that at this point in time the plan is at 75%. the plan document informs me that 8.5% of the money is invested in common stock, 5% in cash equivalents and the remainder is in mutual funds. So, just like my 403B plan with my current employer, the performance of my pension plan is tied to the stock market. Unlike my 403B however, my pension is insured by the federal government through the PBGC Pension Benefit Guarantee Corporation. The document I received goes on to further explain the PBGC benefits.
BOTTOM LINE - notify all past employers where you held retirement funds of your current address. If you received an annual funding notice from past employers regarding your pension plan performance, read through it and file it until next year when you receive a new notice. Don't panic about the information you learned but put it into context of your larger financial picture.