Changes to Retirement Plans

Derisking or “risk transfer” is a strategy employers can use to remove pension liabilities from their corporate balance sheets, either by transferring the pensions to an insurance company or by offering lump sum buyouts to retirees.

• When pensions are transferred to an insurance company retirees are promised an annuity that is exactly the same benefit as they were receiving before, but they lose the insurance protection provided by the federal pension insurance program, the Pension Benefit Guaranty Corporation (PBGC).
• When workers and retirees accept lump sums in as a substitute for their pensions, they are putting themselves in the position of having to invest the money to replicate the security of a pension, which, according to economists, can be very challenging.

In 2015, the Department of Treasury released a notice banning lump sum buyouts to retirees, but this position was reversed in 2019.

Employers and plan trustees are permitted to stop their plans at any time if they follow certain procedures.

If a pension plan stops when it doesn’t have enough money to pay all of the benefits it owes, a federal government agency called the “Pension Benefit Guaranty Corporation (PBGC)” may get involved.

• In the case of a plan offered by one company (a “single employer” plan), the PBGC may take the plan over. In the case of a plan negotiated by a union with a group of employers (a “multiemployer plan”), the PBGC may provide money to the plan to allow it to continue paying benefits.
• The PBGC insures pension plans to make sure that the employees and retirees participating in the plan receive what they are owed up to certain limits. The limits are different for single employer and multiemployer plans.

If a pension plan stops when it has enough money to pay all promised benefits, it is generally required to buy annuities from an insurance company to pay those benefits. If this happens you will be notified which insurance company will be paying your benefits in the future.

• If your pension plan has stopped and you have not been notified by the PBGC or an insurance company of your right to receive or continue to receive your pension, you should contact the PBGC’s Missing Participant Program.
• If you pension plan has stopped and there was more money in the plan that was needed to buy annuities, the provisions of the plan will determine whether the “surplus” assets will be paid to plan participants or the employer. Payments to employers are subject to taxes.

If a retirement savings plan, such as a 401(k) plan, stops, the money in your account must be paid to you or, if the plan is unable to locate you, it must be rolled over into an Individual Retirement Account (IRA) in your name or sent to a state unclaimed property program. The plan administrator can also transfer the money to the Pension Benefit Guaranty Corporation’s Missing Participant Program.

If your employer goes out of business before paying you your 401(k) money and cannot be found, the U.S. Department of Labor will arrange to have your plan taken over by a trustee that will distribute the money in the plan. The Labor Department has a list of “orphaned” 401(k) plans.

If your pension or 401(k) plan stops when it has more money than is needed to pay all promised benefits, a special rule applies. People who have not worked long enough to earn a pension or to “vest” in their employer’s 401(k) matching contributions, may receive benefits. This is called a “partial termination.”

Employers are entitled to “freeze” their pension plans. What this means is that some or all of the employees covered by the plan stop earning benefits. However, they cannot lose any benefits they have earned up until the date of the freeze. There are different kinds of freezes.

A freeze can prevent all current and new employees from earning additional benefits under the plan. This is sometimes called a “hard freeze.”

A freeze can apply only to new employees. In this kind of “soft freeze” existing employees continue to earn benefits under the plan.

• An employer can choose whether to base an employee’s pension on the date of the freeze or the date the employee retires.

Many employers match the contributions that employees put into their 401(k) plans. Employers can stop making those matching contributions at any time as long as they follow certain rules.

• In some instances, employers must give employees 30 days’ notice before they suspend matching contributions.

Employers are generally free to change retirement plan rules for the future as long as most benefits earned up to the date the plan is changed are protected.

Retirement benefits that are protected up to the date the plan rules change include:

• Pension benefits payable at age 65 or other “normal retirement age”
• The share of a special early retirement benefit earned as of the date of the change – if the employee continues to work under the plan and meets the age and/or service requirements for the benefit

Retirement benefits that are not protected as of the date the plan rules change include:

• Special early retirement benefits if the employee has not met all of the requirements for the benefit as if the date of the rule change and does not continue to work for the employer or employers sponsoring the plan
• Disability benefits if the employee is not receiving the benefits at the date of the rule change
• Lump sum payments if the employee has not qualified for the payment as of the date of the rule change
• Most cost of living adjustments

A series of laws enacted in recent years require or allow pension plans that are significantly underfunded to reduce and, in some cases even eliminate, benefits promised by the plans.

• Plans in which one company contributes to a plan (single employer plans) are required to stop paying lump sum benefits and plant shutdown benefits if the amount of money in the plans falls below specified levels.
• Plans in which a group of employers contribute to a plan negotiated with a union (multiemployer plans) are permitted to eliminate special early retirement benefits, special survivor benefits, disability benefits, and lump sums for workers not retired on the date that a plan sends out notices saying that the money in the plan needed to pay benefits has dropped to a level that puts it in what is known as “critical status” or “the Red Zone.”
• The trustees of multiemployer plans that are in even more serious financial trouble, called “critical and declining status” are permitted to apply to the Treasury Department to reduce the pensions of both active workers and retirees (except those who are disabled or age 80 or over – partial reductions are allowed for retirees ages 75 to 79).
• If the Treasury Department does not approve the benefit cut applications and the plan runs out of money to pay benefits in the current year, benefits will be automatically reduced to very low levels guaranteed by the federal pension insurance program, the Pension Benefit Guaranty Corporation (PBGC).