Pension-Plan Freezes Give Me a Shiver

The president of the Associated Press announced Oct. 26 that the wire service wants to freeze its pension plan. A week earlier, it was the parent company of the Milwaukee Journal-Sentinel announcing that it would freeze its pension plan as of Jan. 1.

The AP’s Tom Curley noted that “nearly all media companies … have already frozen their defined benefit plans.” The wire service’s Michael Liedtke wrote in a story, “Gannett Co., owner of USA Today and more than 80 other daily newspapers, froze its defined-benefit plan in 2008 and McClatchy Co., publisher of The Sacramento (Calif.) Bee, The Miami Herald and other newspapers, froze its plan last year.”

But my employer is one of those few that hasn’t*, so these reports made me wonder, what does a pension-plan freeze mean?

The short answer is about what you’d expect: The company stops contributing to its pension plan (also known as a defined-benefit plan). But the effect of that halt gets complicated.

The Pension Rights Center has a good introduction to the subject, and it begins with the reassuring note that a freeze cannot be retroactive. That is, companies cannot take back any benefit that employees have already earned.

The likelihood is that your benefit stops as of a certain point. Whatever you’ve earned up to that point, you keep for your retirement. But your pension will be no larger, whether you put in 1 more day or 15 years more at the office.

My ignorance points up a larger problem: Pensions are an extremely valuable fringe benefit to ensuring a quality retirement, and yet many people my age and younger know little about them – in part because of the general corporate embrace of 401(k), or defined-contribution, plans. These first took hold in the early 1980s.

In many cases, companies elected to redirect their pension-plan dollars into 401(k) programs. (Both AP and Journal Communications say they’ll do this.) For younger employees, CNNMoney.com noted in a 2006 article, this is a valuable change and may result in more retirement income. But it tends to hit older employees right in the neck, since pensions are typically based on salary and pension benefits grow most quickly in the years right before retirement.

Worst of all, USA Today wrote in 2005, are “middle-aged employees who have worked for the same company for years and don’t plan to leave.” Oh, great!

There is also the question of what happens if investments underperform. Under a pension plan, the company has the responsibility to meet its promises, even if a Wall Street swoon means it must put more money into the plan. (My paper has enjoyed the other possibility, making so much money off its pension investments that it hasn’t had to contribute anything in years.)

With a 401(k), that responsibility switches to the employee. He or she makes the investment decisions, and if those decisions prove wrong, he or she must make up the difference (or do without in retirement).

401(k) plans are attractive to companies because their duty ends after they set things up and contribute the promised amount, usually through a match of employee contributions to the plan. Sometimes their annual costs are less with a 401(k) than with a pension plan, too. (AP told its union that it faced $25 million a year in pension plan costs.)

I am a huge fan of pensions, even though I knew nothing about them three years ago. My epiphany came during the 2008-09 recession, whether I started helping my retired dad out with his bookkeeping.

He has a government pension and an IRA, which he started funding in the mid-1970s. But as the market plummeted, so did the value of his IRA account.

If he had needed to rely on only that to supplement his Social Security check in paying his bills, the account would have been drained by the end of 2009. Fortunately, the pension and Social Security more than covered his expenses, so he was able to avoid withdrawing anything from the IRA. Today, with Wall Street’s recovery, that retirement account has more than made up its recession losses.

That convinced me that a guaranteed retirement income is an enormously valuable thing. Indeed, I rate it as the best perk my employer offers.

But the news from AP and Milwaukee makes me worry how much longer that perk will be there.

* – kinda. The Post created a new defined-benefit plan for non-newspaper employees and those hired after Sept. 1, 2009. One could argue that this qualifies as a partial freeze, although I wouldn’t, since new and old employees still get pension benefits.

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