Into the Deep Freeze

A frozen pension may put your best-laid plans on ice. But there are ways to fire up your savings.

By Mary Beth Franklin, Senior Editor

From Kiplinger's Personal Finance magazine, August 2006

If you are counting on receiving a company pension, you may be playing retirement roulette. A pension isn't just a monthly check or a lump sum to cash out at retirement -- it's the key to doing everything you've dreamed about after you quit working. But if your employer changes the rules in the middle of the game, you might have to put your dreams on hold.

That's what happened to Mabel Harrison-Pigott, a manager at one of Verizon's regional offices in New Jersey. She bet that her 24-year career with the telecom giant would pay off with a comfortable pension and early retirement. But earlier this year, Verizon froze pension benefits for more than 50,000 of its managers and nonunion workers, leaving Harrison-Pigott, 49, six years short of full retirement credits. Verizon expects to save $3 billion in labor costs over the next ten years. Harrison-Pigott's personal share will be more than $200,000 in lost pension benefits. "How do you make up for a loss like that at this point?" she asks. "I had planned to retire at 55. Now I expect to work for the rest of my life."

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Verizon's cost-cutting move used to be reserved for bankrupt corporations trying to stay afloat. But over the past couple of years, nearly 20 profitable corporate giantsÑamong them IBM -- have either excluded newly hired employees from participating in their pension plan or ended further pension accruals for workers already on the job.

What would make IBM and Verizon, each of which reported after-tax earnings of more than $7 billion last year, take such drastic action? Simply put, it's an attempt to remain competitive with domestic and foreign rivals that have lower labor costs, as well as to offset the rising cost of health insurance. In addition, many companies don't want to take on the financial risk of having to pay benefits to retirees who could live for decades.

When IBM froze its pension plan, says Alicia Munnell, director of the Center for Retirement Research at Boston College, "that removed the social stigma" and paved the way for other companies to follow suit. If you have a traditional pension plan, you should assume that it will disappear, says Munnell, and be prepared to come up with alternatives.

Caught in the middle

When Verizon announced its pension freeze, it didn't leave its employees totally out in the cold. The company also announced that it would enhance its 401(k) retirement plan, increasing its contribution from 83 cents to $1.50 for every employee dollar, up to 6% of salary. And Verizon gave employees additional pension credits for age and years of service.

When companies put a freeze on their defined-benefit pension plans, younger workers stand to benefit the most from beefed-up 401(k)s. Not only do they enjoy matching contributions over several decades, but they can also take their savings with them if they switch jobs. Older workers with long tenure are often unaffected by the changes because they locked in their pensions under the old rules.

Harrison-Pigott is among those employees who have the most to lose: the 40- and 50-year-old workers who are unlikely to continue working long enough to make up for the loss. Traditional pension plans feature a big bump-up in benefits at retirement, when a formula based on your age and years of service is applied to your final, high-earning years. When a pension plan such as Verizon's is frozen, benefits are based on your highest average pay at the time of the freeze. Subsequent raises or promotions don't count.

Harrison-Pigott, who lives in Kendall Park, N.J., was looking forward to retiring in six years, at age 55, and spending time with her son Michael, now 9, before he goes off to college. "I was beginning to see the light at the end of the tunnel," she says. "But I only saw it for a little while before it was snatched away."

When she learned that her retirement was no longer as secure as she expected, she contacted Doug Lockwood, a financial planner and principal with the Harbor Lights Financial Group, in nearby Manasquan, N.J. Although Verizon offered employees personal estimates of their pension benefits under the new rules, Harrison-Pigott wanted an outside opinion.

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