Pension plan failure. The very idea used to be almost unthinkable. After all, how hard is it for a plan manager to take the money skimmed from workers’ payday, drop it in a relatively conservative investment, and kick out monthly paychecks to retirees? With private pension plans failing left and right, especially in the air transportation and metals industries, we hate to be the ones to say it but does the phrase “Ponzi scheme” come to anyone’s mind?
To be fair, we don’t seriously think pension plan managers went into this planning to defraud vested retirees, but a combination of incompetence and desperation has created the same effect. Too many benefits promised to too many workers in the 1980s and 1990s. Soft performance in the stock market. A lingering recession. Now pension programs are going under, leaving the Pension Benefit Guaranty Corporation (PBGC), a government agency that insures private pensions, to pick up the pieces.
The PBGC was formed in 1974 and, as of the end of fiscal year 2011, operates at a $26 billion dollar deficit. Confidence inspiring? We think not! To believe your pension plan cannot fail is to ignore reality. It can and it might. Ultimately, you could end up being paid pennies on the dollar for what you were promised back in the good old days. The very idea that this is a possibility strikes fear in the hearts of workers everywhere, and it should.
The reality of today’s economics has created an environment where nothing can be relied upon, especially if the government sticks its ineffectual hand into the mix. So how do you know if your pension is in trouble? Are there signs to look for? The first thing to do is resist panic. Though you hear talk of underfunded plans, that isn’t an ironclad indication that it is headed for certain failure. The technical definition of being underfunded means a plan that for three consecutive has assets less in value than 90% of all current and future obligations. This doesn’t mean they WON’T meet future obligations, only that there is a present deficit.
A strong run by the stock market could remedy the situation for many companies. Of course, continued weakness could exacerbate the problem even more. But how can you go about finding out if your pension plan is overextended? Check the newspapers. Run a Google search. Many companies experiencing pension plan funding trouble are well-publicized. If you don’t run across a news story right away, that’s a good sign.
Your next step should be to request a Summary Annual Report (SAR). Larger employers issue these every year. Smaller ones might come out only once every three years. Pay attention to how the plans investments have performed recently. This won’t tell the whole story but might give you a heads up if returns have been anemic, or worse, negative. Though the SAR won’t discuss liabilities, find the Minimum Funding Standards section, which should contain a statement indicating whether or not the plan is meeting current minimum funding standards.
For a more complete picture of pension plan health, ask for a Form 5500. Visit the PBGC’s website to learn how to read the form with an eye towards financial stability. If it looks like your plan is in trouble and you’re already retired, there are a few positives to take away from the situation, though, in the short term, it might make sense to prepare for tightening the belt on your personal budget. First off, the PBGC was created to provide a safety net when private pension funds fail. As long as the agency remains solvent, expect that it will provide some sort of insurance against catastrophic events.
One smart way to respond is to adjust your personal portfolio of investments. But what’s the point in that if the stock market is already failing? Contrary to popular belief, there are other places to park your money besides Wall Street. Real estate is an excellent option and has continued to create wealth for savvy investors despite the recession. For a quick, thorough primer on how to conservatively invest in rental properties for maximum rate of return, consider attending Jason Hartman’s upcoming educational event: “Meet the Masters of Income Property Investing.” This twice yearly presentation gathers real estate experts from around the country and puts their knowledge at your disposal.
Click here to learn more about the Spring 2012 edition. Keep in mind, the best way to avoid the crippling fear of your pension plan failing is to create enough wealth on your own that you don’t need it!
The Heroic Investing Team
Flickr / Abode of Chaos