How is employee pension plan contributions secured and protected?

This recent news article about Sears has me confused.

I’m a state employee and also a university employee. My employer puts in 5% for every full time employee. The employee can also contribute. They could contribute 4% and the employer would contribute 5%.

Any emp contribution between 5 to 10 gets matched. The employee puts in 10% and the employer puts in 10%.

All the money goes to TIAA-Fidelity. Where it’s managed and invested. Most colleges in the US use them. The state doesn’t have any financial obligations. The money gets transferred every payday to TIAA-Fidelity.

This situation with Sears makes no sense. Why wasn’t this pension money invested and managed by a separate company?

Why would this situation be legal? Money paid to pension plans decades ago wasn’t actually transferred? Was this just an accounting entry? We owe this much money in pensions someday in the future?

Sears ended their pension plans in 2006. What they are paying now is for long term employees that worked there decades ago.

What you have is a 401k or something similar which works like you described. What Sears has in an older-style pension plan where the company agrees to pay a benefit of $X/year to retirees, and is obligated to do so regardless of what they did with the contribtuions from employess while they were working. Companies have generally moved away from those pension plans, but Sears was around when that type of pension was standard so still has obligations under their old-style plan, even though they’re probably entirely 401k style retirement plans now.

What you have is a defined contribution plan- you put in a certain percentage and your employer puts in a certain percentage and it all goes to TIAA-Fidelity (although I’m pretty sure those are two different entities) which invests it and manages it. I have a similar type plan- it’s a 457 not a 401K and some of the rules are different- but in both cases, you can lose money and there is no guarantee of a set monthly payment for life. There aren’t any guarantees at all - in 2008, I lost $7000.

I *also *have a defined benefit pension - that's the type of plan that is causing Sears problems. That pension will end up paying me a certain percentage of my salary for the rest of my life- no matter how long that is. And if Sears didn't predict well enough way back when how much money they would need, or how well their investments would do , Sears is going to have to keep putting money into the system now even though the pension system ended over ten years ago. Because there are still a lot of people eligible for benefits under the old plan. And they aren't necessarily only paying for employees who worked their decades ago-  employees have had to be fully vested within 5-7 years in 1996, so someone who started working for Sears in 1989 and who is still there now  would be eligible for a pension when they retire.

**aceplace **asks a question that I have wondered about.

I worked for a company decades ago and became fully vested in an old-school pension plan. The company has since gone bankrupt and is no more.

Does this mean my pension is gone as well? It shouldn’t be, if it had been properly managed and maintained by a third party.


Many company plans are under funded. The company should be setting aside funds with a independent 3rd party and the 3rd party should be investing the money. But how much money is set aside is set by the board of directors and will change every year.

To determine if a fund is fully funded the people with calculators determine the ages of the future and present retires, what the retirement pay each will receive. Through calculations of how much is in the fund now, how much will be added this year and on going years. Then if over the years there is enough money now and in the future to make all the payments the fund is fully funded. If not then what % of funding is there.

So if a company is not setting enough money aside to keep the fund fully funded the size of the fund will begin to decrease at some time requiring more money to be put into the fund. Sounds like Sears was spending now and waiting for the future. And the future is now.

There is one way out for the company. Go Bankrupt. Then the company is off the hook for the money they owed. But this may mean also closing the doors, but not always.

Remember Unite Airlines going bankrupt. The got permission from the courts to stop making payment into the retiremenrt fund. Which was only 50% funded. With out the funds the retirement system cut present retirement checks by around 50%. And existing employees were told that their retirements in the future would be cut.

Also many times the 3rd party retirement board is not so independent. I worked for the Emporium stores, part of Carter Halley Hale (CHH) chain. Our retirement stock plan was managed by Bank Of America. The CHH chairman of the board was on the board of B of A, and B of A’s chairman was on the board of CHH.
Mean Mr. Mustard it may have been managed properly, but was it fully funded?

There is a government program, The Pension Benefit Guaranty Corporation that protects the retirement security of workers in single employer and multiemployer pensions when a company abandons its pension obligations.

You should check with them. They may not pay a full pension (there is a maximum benefit) but a partial payment is better than nothing.

And just to correct the OP, states are not bound by these rules. I spent four years at the University of Illinois and the state put nothing into the pension plan. When I left I took my contribution and ran. Some of the imputed state contribution was made by the federal government on account of a research grant and when I left, they even confiscated that. Had I stayed until retirement, I would have been entirely dependent on the largesse of the state government for my pension. And this is perfectly legal.

Many companies have gone through a transition of converting their pensions to 401k plans. When they do the transition, they often give the option for certain long-time employees to stay with the pension rather than move to the new plan. Newer employees typically don’t have the option to pick. For example, they might say employees with at least 15 years of service and are at least 55-years-old can stick with the pension if they want. Are they legally obligated to provide that kind of option? Or are they doing it just to maintain goodwill with the older employees?

When I retired, besides Social Security I had two 401ks from more recent jobs and a pension from my first ‘real’ job. I had paid no attention to the paperwork they sent me once a year but I knew the pension was $278 a month when I left back in 1991. I called them in 2016 with visions of that amount being doubled – after all, even 3% doubles in 24 years, right?

Wrong. $278 was what they promised in 1991, $278 was what they are gonna pay me today. I had visions of them keeping the money in an old sock, or something.

I’m glad there’s some safety net for people with older pensions.

It’s hard for me accept that underfunded pension plans were allowed. But, it’s clear that they were.

It’s a bit like promising I’ll buy my 5 and 7 year old daughters a car when they turn 16. But never budget & gradually set aside the money as the years go by. Then complain bitterly that the expense will wreck me financially as it comes due.

Ace place - exactly, except the promise of buying them a car was to get them to mow the lawn and chop firewood for years, which they did.

The regulatory complexity that governs the PBGC is mind numbing, as are those concerning its enabling legislation, ERISA. While employee pension plans now are more secure than before, the “safety net” is full of holes. There is no guarantee that all pensioners will be protected in all of their vested interests in any particular case… the loopholes available to pension providers are many and varied, and the protection afforded through the PBGC is limited. Keep in mind, generally speaking the PBGC covers only participants in defined benefit plans. These plans, mostly gone the way of the dodo, have been supplanted by defined contribution plans (think 401-K) and are not covered.

In a perfect world, yes.

However, if you have an established interest in such a plan, you should have received yearly plan statements. Having not mentioned that, I’ll hazard a guess that something is amiss. Either due to some technicality you don’t qualify or, through bureaucratic error your credible interest has been overlooked.

The only way to clear this up is for you to get busy investigating the matter.

True but I think it needs to be emphasized again, though already mentioned several times, the width of the divide between defined benefit and defined contribution plans. There’s no case AFAIK where a corporate bankruptcy has ever affected the balance already deposited in somebody’s defined contribution plan. These are by law individual accounts in the employee’s name managed by outside firms.

Defined contribution plans have arguable flaws as a public policy overall, but they do not have the problem of depending on the continuing solvency of the sponsoring company, nor is there any case AFAIK of fraud by sponsoring companies affecting the individuals’ accounts.

Defined benefit plans have arguable public policy advantages, certainly have a nostalgic appeal to many people. Although these advantages are in the best case still debatable. If the overall situation of the labor market, in view of tax and other public policies, is not such as to force companies to offer defined benefit plans more generous than the matching contributions they make to defined contribution plans, they won’t. Just because big American companies at one time faced little competition from other companies (overseas, or domestic rivals with disruptive new business models) and lots of competition for good workers in the US, doesn’t mean that’s as true now. If companies were forced to go back to DB plans, there’s no reason to think it would increase the net compensation of workers. Water finds its own level in such cases.

Anyway a DB plan is a promise by the company’s owners (shareholders generally in big companies) to the workers, just the like the promises they make to pay suppliers or pay debt (although one or another might come first in bankruptcy). If it can’t pay, it can’t pay. The back up public system of paying instead in those cases is indeed limited, but if it were not limited it would be too much of an incentive to throw more of these promises onto taxpayers. But taxpayers did not make those promises. Taxpayers will be up to their eyeballs making good on pension promises they did make, to govt workers (that elected officials made on their behalf, that is).

Basically IMO the DC concept is more valid for private sector companies. A system which depends on the same companies surviving and thriving for many decades in a much more rapidly changing globalized economy is basically flawed. The defined contribution system does not. It’s basically more suitable for today’s situation. Though that does not mean it can’t be improved.

Both types have their flaws. DB plans are good for workers in that they don’t have any risk (other than the company folding) I work for Company A for 35 years, I say, Sayonara and they keep paying me x amount for the rest of my life. It’s elegant and simple for the worker. The only issue for the worker is that it has a tendency to lock them into a single company which in times past was fine, but now, working for a single company your whole life is much rarer.

DC plans give you the flexibility to do what you want as a worker. Once that money is there, it’s yours. Your company can belly up and you still have your money. The problem is that they shift all of the risk onto the worker and most workers aren’t able to really manage their retirement logically and rationally. It also has a tendency to force workers to make short-term sacrifices for long-term gains. This is something that is very difficult for people to come to terms with, especially on the lower end of the income scale. (You can either have more money in retirement, or you can replace the transmission on your car so you can make it to work. You can’t blame people for choosing the latter.)

Pensions is a topic I have had an interest in since I started collecting on one a few years ago. Fortunately Canada and the Netherlands are two countries that seem to take pensions seriously - pensions are evaluated every 3 years, using the standard actuarial methods to ensure they have enough funds to meet obligations. Should they not, they must present a plan to fully fund within 5 years - and the Canadian government doesn’t accept “we’ll wait until the fifth year”. Pensions must be managed at arms length by a third party licensed management company. The problem that many companies ran into around year 2000 was the perfect DB storm- low interest rates with a crappy stock market, which meant predicted yields were down and the current value of the fund was down too, requiring large contributions. Of course, these are the same companies that did not complain when a booming stock market meant no contributions were necessary for several years. It was still possible for a company to fold without making the necessary remediation, but typically this mean a scenario like 25% reduction in pensions. (Stelco in Hamilton and most recently, Sears Canada come to mind…)

The issue with American defined benefit is, AFAIK, that the company could manage the fund. Some would put company stock into the fund, aggravating the perfect storm scenario because the stock value was going down just as business was bad and profits were down - and a much larger contribution was called for. The government fund there has limits on payouts tied to average industrial wage, so groups like airline pilots with extremely high pay were basically getting nothing. Plus, the board funded itself with a premium on pensions, meaning the good pension plans helped pay for the bad ones - more incentive to get out of the DB pension plans. In the worst case (UK example) one giant media company ran its own pension fund, and the owner raided it to pay for the sinking company - until he emulated his company by jumping off his yacht never to be seen.

Defined benefit pensions are promises to pay later for work done now. As such, they belong to the employee as much as a paycheque does. (I’ve never understood the trope with police and military of “fired and take away your pension”. IF the person was performing that badly for 20 years, you should have done something 20 years ago. If they did a the job recently, what’s the rationale for stealing earned money?)

As for Desert Dog, yes, it’s pretty much standard. Cost of living escalation, if it exists, does not kick in until you start collecting - another incentive not to quit before you retire. The clause for my pension also only increases by one percent less than inflation index, so in reality my pension is discounted by 1% each year. Plus, I found that about 30-something was when the golden handcuffs applied - the net present value of a pension was crap if you quit, since there was 30 years until payout. But we have a 30years-and-out (could collect full pension, vs. age 65 if you quit early) so people had 15 or so years to get a full pension, or take the equivalent value in a locked-in-savings retirement fund that was about equal to half a year’s salary.

An interesting issue with contracts - when the Phoenix Coyotes of the NHL were going bankrupt, the argument was they could nullify the contracts for players and the venue they rented - but did not nullify the contracts with the league and other owners restricting their relocation options. So… bankruptcy provisions removing obligations apparently depend on how rich the people affected are.

Although, a notable flaw on the other side, with defined contribution plans - these can leave the individual vulnerable to predatory retirement fund management companies. The people least able to manage money are the ones who have to decide what to do with their precious retirement funds. Plus, now the individual retiree is the one at risk if the stock market blows up.

Enron, Worldcom, United Airlines, (and others)… All had defined contribution plans heavily funded with their own stock. When those corporations went bust, the employees lost their pensions with no PBGC bailout because they were defined contribution plans.

Because many employees chose the option of investing their contributions in company stock. That was not required for employee contributions in those cases. Although in Enron’s case the company matching contributions were in company stock with tight restrictions on selling it, which has become less common, and restricted stock grants should only be allowed for ‘control persons’, not low level employees.

So two of areas for improvement is 401k’s are:
-more active neutral investment guidance for employees with no clue how to invest, such as those who would concentrate their own investment in the company’s stock. You probably can’t prohibit people doing that if with their own money, just educate them how bad an idea it is.
-matching contributions should not be limited to company stock.

In Canada, all pension funds must be managed by a third party and the company’s control and direction is limited to setting the membership and payout guidelines - and making the cash contributions. Tricks like contributing stock and selling restrictions are AFAIK not allowed. The third-party rule might be another useful rule to protect US retirement savings. After all, the people who run the company would have a conflicting loyalty if they are obliged to both do what’s best for the company and do what’s best for the employee funds.

[quote=“md2000, post:19, topic:821413”]

In Canada, all pension funds must be managed by a third party and the company’s control and direction is limited to setting the membership and payout guidelines - and making the cash contributions. Tricks like contributing stock and selling restrictions are AFAIK not allowed. The third-party rule might be another useful rule to protect US retirement savings. After all, the people who run the company would have a conflicting loyalty if they are obliged to both do what’s best for the company and do what’s best for the employee funds.[/QUOTE

From what you have said Canada seams better at monitoring Pension funds. The US is lacking.

In the US single employer pension funds can get as low as 50% funded before the government will step in and require corrections. Multi-employer (Union) pension funds are monitored more closer. The threshold is 90% funded. If it drops below 90% then a plan has to be drawn up to get the fund properly funded. But if it gets over 100% funded then the surplus has to be returned to those making the payments.

Many companies have worked around the third party management. I worked for a company that had a stock plan as a major part of the retirement plan. The third party management company, a bank, was on paper a independent 3rd party. The bank were the holders of a major loan to the company. The CEO of the company was on the board of directors of the bank. And the bank’s CEO was on the board of the company. The managers of a stock savings account is required not make any purchases that are not in the employees benefits. The operation of the plan called for company to sell stock to the plan once a year at the average price of the stock over the last year. The high in that year was over $57 a share. On the purchase date the stock was selling for $3.30 a share. The managers purchased stock for the employees at over $9.00 a share. By law the managers should have refused to make the purchase at that time because it was not to the employee’s benefit.

My point 3rd party management does not always work if no one is watching the 3rd party.