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Defined Benefit Plans and the PBGC

Background

Currently, 44 million private sector workers and retirees are covered by traditional pension plans. Companies are required to contribute enough money to these plans over time to pay the benefits promised by these plans. Sometimes the amounts contributed, plus investment earnings, are inadequate, or a company becomes financially troubled, and the plan is closed down. Ordinarily, this is not a problem for workers and retirees since most of the pensions payable by these "defined benefit plans" are insured by a federal pension insurance program called the Pension Benefit Guaranty Corporation (PBGC).

What are defined benefit pension plans?

Defined benefit pension plans typically promise to pay a specified monthly benefit at retirement, commonly based on salary and years on the job. Employers contribute to the funds and hire professional money managers to invest plan money. Defined benefit plans are most common among larger companies.

A growing number of employees are covered by “defined contribution” plans, either as a supplement to a defined benefit plan, or as a company’s only plan. In a defined contribution plan there is an account in your name, and actual dollars are put into the plan either by you or your employer or both. The most common kind of defined contribution plan is a 401(k) plan, where employees can choose to make contributions, and ordinarily decide how their money will be invested. Defined contribution plans are NOT protected by the Pension Benefit Guaranty Corporation.

A fairly new kind of plan, often called a “cash balance” plan, looks a lot like a defined contribution plan, but is treated as a defined benefit plan. These “hybrid” plans are funded by employers who promise to credit specified dollar amounts to “hypothetical” accounts for each of their employees, and to credit those accounts with specified interest payments. For technical reasons, these are considered to be defined benefit plans and are insured by the PBGC.

What is the PBGC?

The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency entity that insures retirement benefits for participants in defined benefit pension plans. The PBGC was created thirty years ago as part of the Employee Retirement Income Security Act of 1974.

The PBGC protects most pension benefits in most defined benefit plans. But not all plans are insured and not all benefits are guaranteed. If you are covered by a defined benefit plan, it is very important that you know whether your plan is insured, and whether all of your benefits are guaranteed. Visit the PBGC website to find out which plans are insured and what benefits in those plans are guaranteed.

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