Last Updated: January 5, 2009
The Pension Benefit Guaranty Corporation (PBGC), which insures the nation's private-sector defined benefit pension plans, recently reported that 1,225 single-employer plans ended in standard terminations in fiscal 2007. That equals about 4 percent of all single-employer plans that the agency insured at the beginning of the year.
In addition, the PBGC became trustee of 110 insolvent plans that were sponsored by financially distressed employers in fiscal year 2007. According to the PBGC, the majority of single-employer plans that ended in standard termination during fiscal year 2007 were small plans – 75 percent had fewer than 25 participants.
Plan sponsors – large and small - terminate their defined benefit plans for many reasons, according to a recent PlanSponsor report. Companies primarily terminate defined benefit plans as part of retirement program restructuring. But sponsors also terminate their plans for other reasons, including the expense of the benefits, adverse business conditions, the expense of plan administration, the sale of the company or a component, and liquidation. In addition, small plan sponsors also terminate their plans for the following reasons: the plan is "not meeting the sponsor's needs" or the "retirement, illness, or death" of the business' owner.
Most defined benefit plans don't get terminated. But if you're worried about your employer's pension plan being terminated, consider the following.
- Check whether your pension plan is insured by the PBGC. The PBGC is a federal corporation created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers and retirees in more than 29,000 private single-employer and multiemployer defined benefit pension plans. The PBGC insures defined benefit plans, the type that promise to pay a specific monthly benefit at retirement. It does not insure retirement plans that do not promise specific benefit amounts ("defined contribution plans"), such as profit-sharing or 401(k) plans. According to the PBGC, the easiest way to learn whether your pension plan is insured by the PBGC is to ask your employer or plan administrator for a copy of the "Summary Plan Description," or SPD. The SPD will state whether your plan is covered by the PBGC program.
- Check whether your pension is underfunded. According to the PBGC, your plan administrator is required to give you an annual written notice regarding the funded status of the plan. You also have a legal right to obtain information about your plan's funding by requesting the information in writing from your plan administrator.
- Determine whether your pension plan's termination is standard or because of financial distress. There are two ways an employer can terminate its pension plan. According to the PBGC, the employer can end the plan in a standard termination but only after showing PBGC that the plan has enough money to pay all benefits owed to participants. If the plan does not have enough money to pay all pension benefits owed to participants, the employer is in financial distress. Assuming certain conditions are met, the PBGC normally will take over as trustee of the plan and pay plan benefits, up to the legal limits, using plan assets and PBGC guarantee funds.
Of note, your plan administrator must notify you in writing if your employer wants to end the plan, according to the PBGC. You must get this notice, called the "Notice of Intent to Terminate," at least 60 days before the proposed termination date. Learn more about PBGC.