A common concern posed by pension participants is how secure those payments will be in the future. Given the economic turmoil in the past few years, it is certainly a worthwhile question. The good news is that the vast majority of retirement benefits are more secure than you might think. As a Dallas employment attorney experienced with pension issues I can tell you this is a legitimate concern for employees and retirees.
Pension benefits are not an easily understood issue. Plan rules are complex. The benefit formula for a pension plan is just as complex. The legal issues around pensions and other retirement plans are even more complex. If you believe there is a problem with your retirement plan benefits then you should speak to a Texas employee benefits attorney right away.
ERISA governs many retirement plans for workers in Texas and around the nation
ERISA governs most defined benefit pensions, 401ks, ESOPs and similar plans. It is the Employee Retirement Income Security Act of 1974. ERISA requires plan sponsors – typically employers – to operate the plan with several protective measures. Plan assets must remain in trusts. They remain separate from the employer’s assets and protected from any creditors, judgments or liens against the company. (For that matter, generally protected from participant’s creditors, judgments and liens.)
Employers also have fiduciary duties to operate the plan in a responsible manner in the interest of the participants. Additionally, ERISA sets out requirements that plans fund benefits accrued by participants. For plans referred to as defined contribution plans, such as a 401k, benefits are fully funded upon the plan’s contribution schedule. For example, if you contribute from each paycheck and your employer contributes in match, ERISA requires the full $200 deposited within a set period following the date of paycheck deferral.
Defined benefit pension accruals for workers
However, for a defined benefit plan, like what is commonly referred to as a pension, the benefit accrued is a calculation of what monthly benefits should be at the plan’s normal retirement date.
ERISA requires plans to periodically calculate the present value of all of the future monthly benefits due on the plan and fund the plan trust for the full value of those future benefits if the trust does not already have enough money. For this reason, even if an employer goes bankrupt there should still be funding for those future benefits.
Unfortunately, when a company gets into financial trouble there may be a gap in funding the plan trust that means the benefits already owed may not receive funding to their present value. The Pension Protection Act of 2006 (PPA) sets out several measures to help plans get back on track with funding. In the case where a company cannot fund the plan and/or goes bankrupt, there is a final fail safe protection.
Employers with defined benefit plans pay insurance on pension benefits to the Pension Benefit Guaranty Corporation (PBGC). The PBGC is like the FDIC for pension benefits. Like the FDIC, it is a public corporation. When the PBGC has to assist with a plan, they take over administration of the plan and will use the trust assets to pay benefits.
If the trust assets are not sufficient, the PBGC will cap benefits at a Congressionally-mandated limit and will pay out of its own assets the difference between what the trust can pay and the benefits owed up to the cap. Without the PBGC employees and retirees would have to hire employment lawyers to sue the plan for benefits.
Non-ERISA retirement plans
In some cases employees have employer-sponsored retirement benefits not governed by ERISA. These plans typically exist for highly compensated employees, officers and directors (but may apply to others). They may be either defined contribution or defined benefit plans.
It is most common for these plans to be “restoration plans”. Restoration plans permit the company to give benefits when ERISA limits the ability to accrue benefits at a cap. Section 409A governs these plans. 409A establishes some protections but not the level of protection that ERISA provides.
409A plans may or may not remain in trust. Under 409A, employers do not have to hold plan assets in trusts. They can pay benefits out of normal operating assets. If the company does not have the money to pay benefits, participants may find themselves with empty hands. Participants may have to sue the employer to recover or in bankruptcy, line up with the rest of the creditors.
Employment attorneys for retirement plan issues and other employee benefits problems
The greatest urgency in any retirement plan issue is that the assets due to pay for plan benefits will disappear. The plan administrator may rob the plan or investments may drop to zero, leaving the plan underfunded or empty. This is a worst case scenario but often small problems in a retirement plan is the smoke to a fire. Small financial problems today can quickly become large financial problems.
Of course, not all retirement plan issues are this serious. You may have a problem with an improper benefit calculation or denial of benefits. These are not urgent for the plan but may be urgent for your life. Retirement plans often require specific claim procedures before you can take legal action against the plan. Start on the right foot by working with an employment lawyer who understands these procedures.
Employee benefits law is a niche form of employment law. Not all employment lawyers represent clients in employee benefits claims. There are few employee benefits lawyers in Texas who represent employees and retirees. Employers receive legal advice from employment lawyers at employer-side law firms that represent employers.
These law firms often have special departments of employment attorneys who exclusively deal with employee benefits issues under ERISA and similar laws. These employment attorneys have great expertise in benefit plan issues but do not represent employees or retirees.