How secure are your retiree benefits?


By Dave Carpenter

Retiree benefits aren’t as secure as they used to be, as auto and airline workers and others have learned in recent years.

Kodak workers are among those who will experience the changes as the company reorganizes under bankruptcy protection. Kodak wants to end health care benefits for about 16 thousand retirees who are over age 65 and eligible for Medicare. Other companies are doing the same, either in or out of bankruptcy.

The biggest pain is likely to be felt by baby boomers, who are mostly still in the workforce but facing increasing prospects that their employers may freeze their pensions, reduce or eliminate company matches in their 401(k) plans and shrink health benefits.

“Baby boomers would do well to recognize that they’re not going to be looking ahead to as comfortable a retirement as their parents had,” said Olivia Mitchell, head of the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania’s Wharton School. “Their parents had a secure Social Security system, generous Medicare system, defined-benefit pensions and retiree medical benefits.”

Traditional pensions are fast vanishing and the other areas all are considered fodder for potential cuts in the years ahead.

But workers who have been retired for 10, 20 or 30 years are feeling it, too, because some also are losing health and life insurance benefits.

Here is an overview of key concerns for retirees and near-retirees concerning benefits:

Q: How can a company promise benefits and then renege on them years later? Are there no protections for workers?

A: It’s perfectly legal for companies to eliminate benefits that have not yet been earned.

Pensions, medical benefits and even vacations all are considered to be voluntarily provided benefits. It’s more common in other countries to have mandatory insurance and vacations, said Rebecca Davis, legal director of the Pension Rights Center in Washington.

So-called anti-cutback rules in the federal tax code offer some protection. They generally prohibit a company from taking away any accrued benefits. But that’s not the case with future benefits. And the precedents set by companies since the early 2000s point toward increasing reductions.

Q: How vulnerable are pensions?

A: Pension assets generally are not at risk in a company bankruptcy because pension cash must by law be kept separate from business accounts. But some retirees with higher paying pensions may not get the full amounts.

Pensions offered by private employers are typically secured by the Pension Benefit Guaranty Corp., which takes over failed pension plans to continue paying retirees. But the federal agency caps the benefits it pays out to retirees annually. The maximum for 2012 is $55,841, so if your employer goes under your pension benefit is capped at that amount.

Outside of bankruptcy, the bigger risk for retirees is having their pensions frozen, meaning the amounts handed out in retirement will be thousands of dollars less per year than they were told. “The law gives companies the opportunity to break promises to their workers,” said Davis.

And almost no company still offers pensions to new employees. Only 14 percent of private sector workers still had traditional, defined-benefit pensions in 2010, according to the Employee Benefits Research Institute. That’s down from 28 percent in 1990.

Q: What benefits are the likeliest to be cut?

A: Health benefits. Unlike with pensions, retiree health care benefits are not protected by law, said Ed Beltram of the nonprofit National Retiree Legislative Network.

Most companies have “reservation of rights” clauses that effectively say they reserve the right to change or eliminate benefits such as health care and life insurance. Hundreds of companies have taken advantage of them to reduce or eliminate those benefits in the past decade.

In bankruptcy, benefits can be reduced or wiped out with a judge’s approval.

One typical reduction that particularly hurts retirees is when companies reduce life insurance from a year’s salary to $10,000 or less, Beltram said. Retirees who wish to have more life insurance can find it unaffordable or impossible to secure new policies in their 60s, 70s or 80s.

Q: What about company-sponsored 401(k) retirement plans?

A: Your 401(k) or other defined-contribution account, if you have one, is protected by law. The assets in the plan are yours and are managed for you by a service provider hired by your employer.

Many companies froze the matching contributions to 401(k)s after the financial meltdown of 2008. The good news: In one recent study by business consultant Towers Watson, 75 percent of the mid- to large-sized companies that had lowered or suspended their 401(k) contributions have resumed them — three-quarters at the same level as before.

The big 401(k) danger for retirees and workers alike is having their accounts heavily dependent on their employer’s stock. If the company gets into financial trouble or files for bankruptcy, the collapse of the stock can devastate savings. The prime example: Enron Corp. Enron employees held nearly 60 percent of their retirement assets in company stock when the shares went from $90 to nothing. — AP