Is My Pension Income Protected?

 

By Jon Flynn

 

A retired client of mine recently phoned me in a panic.  Hey just read in the newspaper that his former employer was going out of business. His main concern was whether or not his monthly pension income would disappear. He sighed and said, “I count on that money to get by, how will I live if my income is taken away from me? 

 

Given the severity of this financial crisis many of you are probably wondering the same thing - “Is my pension income still going to be there if my former company goes under?”.  Many companies are currently struggling and some will certainly fall victim to this current economic mess.  The storm is severe and your former employer could be at risk of failure.  How do you know if your income is safe?  Let’s take a look…

 

Generally, pension plan assets should not be at risk when a company declares bankruptcy. Why?   Federal legislation implemented in 1974 was created to safeguard the pension incomes of all Americans.  It’s called the “Employee Retirement Income Security Act of 1974” or ERISA for short.   

 

The act works to protect pensioners in the following ways:

 

Mismanagement:   Those in charge of your plan, called “fiduciaries”, are required to behave in a prudent and responsible manner with respect to all aspects of management and administration of the plan.  They must take into consideration and comply with ERISA provisions that prohibit the mismanagement and abuse of plan assets.

 

Protection from creditors: The act requires that promised pension benefits be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Thus, if your company declares bankruptcy, the retirement funds should be secure from the company’s creditors.

 

Shoring up underfunded plans: The act also requires that promised pension benefits be adequately funded.  However, with the stock market’s recent declines, many funds are underwater. If a company is profitable and healthy, they could make a contribution to the plan and bring it back up to the proper funding level.  However a bankrupt company couldn’t afford to do that.  That’s when the Pension Benefit Guaranty Corporation (PBGC), a Federal Government entity steps in and will assume responsibility for most traditional defined “benefit” plans. The PBGC pays benefits after plan termination up to a certain maximum guaranteed amount. On the other hand, defined “contribution” plans, such as 401(k) plans, are not insured by the PBGC.

 

Remember, your economic survival doesn’t necessarily depend on your former companies.

 

Jon Flynn is a Certified Financial Planner ^TM and owner of Flynn Financial in Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC and of Securities America Advisors, Inc. Flynn Financial and Securities America are unaffiliated.   Mr. Flynn can be reached at 570-876-5015.