published Wednesday, May 15th, 2013

ERISA law helps ensure safety of worker pensions

Chris Hopkins

Q: Is my pension secure if my employer goes bankrupt?

A: Generally, yes, up to a point, depending upon the type of plan your employer provides.

We often use the word "pension" quite loosely to describe retirement benefits in general. However, there are vast differences in specific plan types and features. A true pension (from a Latin word meaning to weigh, hence a periodic payment or installment) is a regular series of payments from an employer following the retirement of an employee, typically for life. This type of retirement plan is referred to as a defined benefit plan, since the payment stream is known and constant, while the employer bears the fiduciary responsibility of funding the plan to ensure

the promised cash flows. If all goes well, the retiree can count on a known and constant monthly income for the duration of the employee's life.

Of course, all does not go well in too many instances. Prior to 1974, promises of future retirement payments were essentially general obligations, just like payments due to trade creditors or lenders. In extreme cases, pensioners received little or nothing in the wake of a default or bankruptcy by their former employer. Recognizing the need for reform, Congress passed the Employee Retirement Income Security Act, or ERISA, which imposed certain statutory requirements on employers who sponsored defined benefit plans. The act created a governmental agency (the Pension Benefit Guarantee Corporation) that collects insurance premiums from employers and provides limited indemnification to employees in the event their company goes bust.

The insurance is not total, with a current maximum annual benefit of $57,477, but is sufficient to insure the promised payments for most workers. However, the question becomes less relevant with each passing year as traditional defined benefit (pension) plans go the way of the dinosaur or the balanced budget. According to the Bureau of Labor Statistics, just 22 percent of private sector workers are covered by pension plans today, compared with 42 percent in 1990. (Interestingly, 92 percent of government workers are still covered by defined benefit plans).

Certain small plans are exempt from ERISA coverage, primarily professional service corporations like medical or legal practices with less than 26 employees, and most church groups. And bear in mind that health benefits, vacation, and severance pay is not covered.

Most of the rest of us are covered under so-called defined contribution plans (if we are covered at all). These are the familiar 401(k), 403(b) and the like that make no promises regarding future payouts but allow pre-tax salary deferrals and employer matching contributions. This type of plan requires an independent custodian like a broker-dealer or insurance company to hold the assets in trust, separate and isolated from the books of the employer. With these plans a corporate crash does not imperil the retirement savings of the employees, but does require them to do most of the heavy lifting in terms of saving and making the investment decisions.

In the old days, a corporate bankruptcy frequently spelled disaster for retirees. Today, you can rest much easier.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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