Occasionally, in this era of gloomy nest egg prospects, Dallas Salisbury gets to be the bearer of good news and point out retirement benefits that people have overlooked.
“I had lunch with somebody who has worked for a large company for 21 years who was unaware that his company has a defined benefit plan,” says Salisbury, who is the president and CEO of the Employee Benefit Research Institute (EBRI).
While many people are familiar with their 401(k) plans, they know next to nothing about the more traditional type of pension plan.
A 401(k) is a type of defined retirement contribution plan, financed with planned payments from the worker, the employer, or both. About 82.5 million Americans participate in private sector defined contribution plans, according to EBRI.
Defined benefit plans typically are financed entirely by the employer, with the benefit based on a formula involving salary and length of employment. Although the number of companies offering defined plans has dropped dramatically since the mid 1980s, about 42.3 million still participate in this type of retirement plan.
Just the same, many people don’t have a good sense of what’s in their retirement basket. According to a recent Fidelity Investments survey, 71% of defined benefit plan participants said they do not have detailed knowledge of how the plans operate. Sixty-one percent said they have never inquired about how much money they will receive upon retirement, and 40% don’t know what their payment options will be when they retire or leave the company.
Part of the problem may have to do with the fact that employees have little involvement with traditional defined benefit plans, says Wendy Foster, senior vice president in Fidelity’s defined benefit business. “People watch their 401(k)’s more closely” because the individual has more control over the funds and can make changes, Foster says.
What’s the chance your company offers a defined benefit plan? “The larger the organization, the greater the likelihood,” Foster says. The plans also are more common in more traditional, unionized industries.
How do you find out if you do have a defined benefits plan? Check the usual sources — the HR department, your employee handbook, or your company’s website.
If you do find that you are in a defined benefit plan, Salisbury recommends getting a copy of the plan description and asking a few questions: “Have you been mailing me a benefits statement that I haven’t bothered to look at? Can I get an estimate of what I would currently be entitled to?”
You may not able to make adjustments to your plan the way you can to a 401(k), but you do need to calculate how it will fit into your overall retirement package.
“A person might think: I have an IRA, a 401(k), and oh I have a [DB] pension over here. You need to educate yourself.”, Foster says.
It’s not just workers nearing retirement age who need to make such calculations.
Younger employees also need to understand how a defined benefit plan fits into the picture, Foster says, because “it may help them think differently about how they would invest their other money. And it may impact their decision on whether they want to stay with an employer.”
Many workers, especially younger ones, have never run a retirement projection, according to Financial Finesse. A survey by the financial education provider found that 57% of employees age 55 to 64 said they had not run a calculation to estimate whether or not they were on track for retirement. This number grew with younger generations: 68% of employees age 45 to 54, 67% of employees age 30 to 44, and 73% of employees under 30 said they had not run a retirement projection.
Employers can give their staffers guidance in making such calculations, says Nancy Anderson, who is a director at Financial Finesse. Anderson also recommends finding a financial planner through the Certified Financial Planner Board. And help is available at the federal government’s Financial Literacy & Education Commission’s website.
Dallas Salisbury has one more bit of good news to offer to future retirees: “You also may have a defined benefit plan from a previous employer.”
Employers generally do give departing employees information about their pension benefits, but it may be overlooked in the excitement of a new job or the uncertainty of a layoff.
“Many people do not know this but there’s an entire program funded by the government trying to find people who have pensions — the money is just sitting there,” Salisbury says.
The Social Security Administration can help you get information about a lost pension. If the company you worked for closed or if its plan has been terminated, check the Pension Benefit Guaranty Corporation.