Don't Assume Your Pension Is Safe

Even healthy companies are reducing retirement benefits.

By Selena Maranjian

updated 5:38 a.m. ET July 23, 2008

You probably know that many companies are freezing or even eliminating their pension plans. Workers could once expect to collect a pension in retirement -- a "defined benefit" -- but today, many folks are being offered only "defined contribution" plans, such as 401(k)s, in which the amount that they (and sometimes their employer) will contribute to the plan is set but the eventual value of the account is uncertain.

Can you think of some companies that have frozen their plans? General Motors (NYSE: GM), the struggling carmaker? Yes. Sears Holdings (Nasdaq: SHLD), the hard-hit retailer, and financial services giantCitigroup (NYSE: C)? Yes to all three. Gannett (NYSE: GCI), the struggling newspaper and broadcasting company? Yep, you got it.

If you're patting yourself on the back for working for a healthy, growing company, don't think you're in the clear, though. IBM (NYSE: IBM), which sports net profit margins above 10% and revenue growth of more than 10% recently, froze its pension. So did Alcoa (NYSE: AA), whose stock has risen nearly 9% annually over the past decade. Then there's Verizon (NYSE: VZ), too, and many other companies not exactly in their death throes.

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What's the lesson here? Simple: Don't assume your pension is safe. When companies freeze or shrink pension plans, they often benefit financially, so tweaking the pension program is an attractive option for many healthy companies. They can ditch the responsibility to come up with certain amounts of money for retirees, and they can more easily manage making set contributions to 401(k) plans.

There is some good news. If your pension plan goes belly-up when your company files for bankruptcy protection, you may still end up receiving some or all of your pension, thanks to the federal government's Pension Benefit Guaranty Corporation (PBGC). But what the government won't do is make up for lost benefits if your company freezes or shrinks your pension.

So you should prepare yourself for the worst-case scenario of becoming pension-less. According to a 2007 report by Watson Wyatt, between 2001 and 2004, the number of Fortune 1000 companies that froze benefits increased considerably, from 5% to 11%.

The good news is that by planning and taking action now, you can still retire very well. Learn much more in our 401(k) guide and our IRA Center. And for detailed guidance on retirement planning, you can test-drive, for free, our Rule Your Retirement newsletter service. A free trial will give you full access to all past issues. It regularly offers recommendations of promising stocks and mutual funds, too.