Pension plan choices may shrink
Underfunding could affect many
The stock market's decline has already ravaged your 401(k) plan. Now it could hurt your pension, too.
Under a law that took effect last year, underfunded pension plans may be forced to limit lump-sum payments and suspend cost-of-living increases for retirees. In addition, some plans could be frozen, preventing current employees from earning credit for additional years on the job.
"Companies are going to have to make drastic decisions about their pension plans," said Peter Austin, executive director of BNY Mellon Pension Services, which advises businesses on retirement plans.
Pension funds are typically invested in a mix of stocks, bonds, and other securities, most of which have fallen sharply. By some estimates, thousands of pension plans could be affected by the law because their funds have become so depleted. Watson Wyatt Worldwide, a consulting firm, estimated pension assets declined 26 percent in 2008. The firm also reported the 100 largest US pensions were just 79 percent funded in 2008, compared with 109 percent funded at the end of 2007. That means they have 79 cents set aside for every dollar owed to current and future retirees.
About one-third of employees nationwide participate in a traditional or defined benefit pension plan, according to the Employee Benefit Research Institute, a Washington nonprofit.
The law has already started affecting some local employers. For instance, Boston book publisher Houghton-Mifflin Harcourt Publishing Co., notified its 5,000 employees last week that effective April 1 they no longer have the option of receiving a lump-sum payout at retirement. Now, they can only receive half the money, with the rest paid in traditional monthly payments.
"We had no choice," said Houghton-Mifflin spokesman Josef Blumenfeld. "The law doesn't leave us with any latitude."
Nortel Networks Corp., a telecommunications equipment maker that recently filed for Chapter 11 bankruptcy protection, said it was also required to stop making lump-sum payouts because its pension was underfunded. Nortel, based in Canada, has 30,000 employees, including about 680 in Massachusetts.
While the way retirees receive their pensions may be affected by funding problems, the plans themselves are not at risk. Even if a company files for bankruptcy, most traditional pensions are guaranteed by the federal Pension Benefit Guaranty Corp. - up to $54,000 annually for someone who retires at 65. The agency said it guarantees more than 29,000 private pension plans.
But the law does require companies to cut back on some benefits that employees may have counted on, said Robert D. Webb, a partner at the Boston law firm of Nutter McClennen & Fish. Webb said the restrictions are intended to act as a "safety valve" to ease pressure on underfunded plans.
Specifically, when pensions are less than 80 percent funded, the law bars companies from disbursing more than 50 percent of a benefit in a single payment.
While retirees traditionally receive a pension as a lifetime monthly payment, roughly half of companies offer lump-sum payments, said Carrie Duarte, a principal at PricewaterhouseCoopers' human resources practice in Boston. Most workers who have the option take it, she said, so they can have more control over their money by investing in a tax-deferred retirement account.
The law also makes it more difficult for companies to sweeten pensions, such as by adding early-retirement benefits, cost of living increases, or faster vesting. The restrictions don't apply to public pension plans covering government workers.
The law becomes even tougher when plans fall below 60 percent funding levels. Companies are then barred from making any lump-sum payments or providing "shutdown benefits" - accelerated pension payments - that some employees are promised if their offices close.
For pensions that cover union workers at more than one firm, the law requires restrictions on lump-sum benefits when they fall below the 65 percent funding threshold or suffer other liquidity problems. More than 100 such plans nationwide were critically underfunded last year, according to the US Department of Labor. That included the New Bedford Fish Lumpers Pension Plan, which notified the Labor Department in April 2008 that it faced a deficit and was considering trimming benefits, including early-retirement and disability payments. The pension office did not return calls seeking comment, but it has 71 participants, mostly retirees, according to filings. Fish lumpers unload fishing vessels.
Jerry Mingione, a principal at Towers Perrin, a Connecticut company that advises businesses on retirement benefits, estimated that nearly half of pension plans may have to limit disbursements unless they step up contributions or find other ways to avoid the restrictions. Nearly 5 percent of plans nationwide could fall short of the 60 percent threshold, he added. Richard Wildt, a principal at Deloitte Consulting in Boston, agreed with those estimates.
Duarte of PricewaterhouseCoopers said she has spoken to executives at Massachusetts companies who are scrambling to ease the impact on workers. For example, she said, some are contributing more money to pension plans, while others are looking to trim benefits.
"We are having many more discussions," Duarte said. "Companies are trying to do the right thing."
Todd Wallack can be reached at twallack@globe.com. 