Pensions used to be a reliable stream of retirement income, but these twists and turns could put a pension benefit in jeopardy. By Eleanor Laise, Senior Editor April 4, 2012 EDITOR'S NOTE: This article was originally published in the April 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.Traditional pension plans are supposed to offer a predictable plot line: You work a certain number of years, and in the end, you get a specific monthly benefit. SEE ALSO: Pensions Show Sign of Life But for a growing number of seniors in or near retirement, these plans are more like a fast-paced detective story -- one that's full of surprises, many of them unpleasant. Amid a sluggish economy, low interest rates and lackluster market returns, pension plans are undergoing a new cycle of financial deterioration. In response, plan managers are tightening the screws on participants. Some seniors are discovering loopholes in their pensions that allow plans to skirt regulatory oversight. Others are finding that their employers have handed off pension obligations to unfamiliar third parties. And in some cases, benefits have been trimmed for current retirees -- a group that has traditionally been spared major pension cuts. Advertisement Such changes are unsettling for seniors who depend on their defined-benefit plans as a key piece of the retirement-income puzzle. Nearly one in four people aged 55 and older receive income from private or public pensions, according to 2010 data from the Employee Benefit Research Institute. Still, many workers and retirees remain oblivious to their pension plans' problems, and they may be unprepared for a shortfall in income. In a recent survey of corporate pension plan participants, Fidelity Investments found that more than 70% don't have detailed knowledge of how their plans operate, and 61% never asked how much money they will receive in retirement. Many plan participants said they were relying on their employer to provide information. But "you do have to be your own advocate in a lot of ways," says Rebecca Davis, legal director at the Pension Rights Center, a consumer advocacy group. "There's a lot of misinformation" delivered to pension plan participants. The current round of pension surprises is just the latest chapter in the long story of the plans' decline. Just 15% of private-sector workers participated in a defined-benefit plan in 2008, down from 38% in 1979, according to EBRI. And at the end of 2011, the total pension deficit among 1,500 of the largest companies widened to $484 billion, up $169 billion from a year earlier, according to consulting firm Mercer. Given the embattled state of many pension plans, workers and retirees relying on these plans for steady income may need to do some detective work. While you can't control many of the changes affecting pension plans, you can gain a basic understanding of the plan's financial health, review benefit statements for accuracy and stay abreast of developments in your employer's industry. Those steps can at least give you advance warning that an income stream is running dry. Here's a look at the twists and turns that may affect your benefits, along with tips for pension sleuthing. Advertisement Wandering pension plans. A corporate shake-up can send your pension benefits spinning off in unexpected directions. That's what happened to some workers who retired from Verizon Communications or predecessor companies that subsequently combined to form the telecom giant. In late 2006, Verizon spun off its yellow pages directories business, creating a new company called Idearc. Around the same time, thousands of workers whose last employment was with the directories business were transferred to Idearc pension plans, with their old promised benefits. By early 2009, Idearc announced that it was going through a bankruptcy reorganization, and it emerged from bankruptcy in early 2010 with a new name -- SuperMedia. In an ongoing class-action lawsuit filed in U.S. District Court for the Northern District of Texas, retirees who were transferred from Verizon to Idearc pension plans claim that the switch was contrary to the terms of their plans' governing documents. As Idearc's financial problems developed in the following years, the retirees claim they lost substantial non-pension benefits. For example, the retirees have been asked to pay more for health care coverage, says C. William Jones, president and executive director of the Association of BellTel Retirees. In the lawsuit, the retirees are asking to be transferred back to Verizon pension and benefit plans. People who retired many years before Idearc's formation say the shakeup left them feeling confused, betrayed and angry. Kurt Roessner, 68, of Toano, Va., says he originally went to work for the phone company in the early 1970s in part because of the promise of a stable pension. After a 24-year career with various Bell companies, he retired in 1995 from Nynex Information Resources. Nynex subsequently merged with Bell Atlantic, and Bell Atlantic then merged with GTE to form Verizon. Now he's in the SuperMedia plan. He has already lost the subsidized telephone service that was once part of his benefit package, he says, and given the company's checkered financial history, he's concerned about the stability of his other benefits. "Don't change the rules on me when I'm 65," Roessner says. In a statement responding to the retirees' claims, Verizon said, "the agreement between Verizon and Idearc on pension benefits was consistent with the law and the benefit plan documents. No benefits were taken from retirees." A SuperMedia spokesman said the company declines to comment "about matters in litigation." Advertisement In some cases, retirees may lose track of a former employer that goes through a merger, spinoff or other corporate reshuffling -- or that employer may lose track of the records showing benefits retirees are owed. Keep records of your employment history, including W-2 forms, as well as individual benefit statements, summary plan descriptions, and other notices from your plan. The Pension Benefit Guaranty Corporation's Web site (www.pbgc.gov) has a searchable database of people who are entitled to pension benefits but can't be located. The site includes a link to detailed tips on finding a lost pension. The U.S. Administration on Aging's Pension Counseling and Information Program, a network of nonprofit organizations offering free legal help for pension participants, can also help. A list of counseling groups is available at www.pensionrights.org/counseling-projects. Regulatory loopholes. Some employers are finding ways to skirt the federal law that provides key protections for pension plan participants. The federal law known as ERISA (for Employee Retirement Income Security Act) mandates that private pension plans give participants information about key features and requires employers to adequately fund the plan. And if a plan is terminated, ERISA guarantees that participants will continue to receive a certain level of benefits, through the PBGC. Plans governed by ERISA pay premiums to the PBGC in exchange for this insurance backing. Advertisement A major exception to ERISA coverage is the so-called church pension plan. An employer can request that the IRS issue a ruling that its plan is a church plan -- defined as a plan established and maintained by a church or association of churches. Church plans are generally governed by state laws, which don't offer the same participant protections as ERISA. Though church-plan requests have long flown under the radar, workers and retirees are now hearing more about this maneuver. Under IRS rules issued last year, the plan participants must receive notice that such a request has been submitted. Many workers receiving those notices question whether their plans should be considered church plans, or whether their plans are simply trying to evade federal law. Bruce Pardo, 64, of Belle Mead, N.J., says he was alarmed when he received such a notice last fall from his former employer, Saint Peter's Healthcare System, which operates a hospital, nursing home and other health care facilities in New Jersey. A former vice-president for human resources who is now retired and receiving a pension from Saint Peter's, Pardo believes the plan doesn't fit the definition of a church plan, arguing in a letter to the IRS that the plan was not established and maintained by a church. "I'm concerned about it and concerned for the employees who I knew and worked with there," Pardo said in an interview. "There's so much uncertainty in the world, you certainly don't need it once you're vested and retired." Saint Peter's spokesman Philip Hartman says that "we clearly qualify as a church plan," adding that a Catholic diocese oversees the hospital. Saint Peter's paid PBGC premiums through last year but plans to ask for those payments to be refunded to the plan, Hartman says. As a church plan, Saint Peter's would not be covered by the PBGC. The plan has not yet received a church-plan ruling from the IRS, he says. Thanks to the new notification requirements, participants in plans requesting church-plan status now can ask the IRS to deny the request. Those comments must be submitted within 60 days of the date that participants are notified of the church-plan request. A sample IRS comment letter is available at the Pension Rights Center's Web site (www.pensionrights.org). Participant advocates say the church-plan designation was meant to exempt only plans actually established and maintained by a church or church pension boards. Congress intended the exemption to be narrow and applied only to those types of plans, rather than any church-related organization that has its own plan, the Pension Rights Center says. Some workers whose employers received church-plan status have found that their plans are quickly running out of money to pay promised benefits, according to the center. Funding woes. When an employer terminates a plan that's insufficiently funded, the PBGC is likely to take over the plan and continue benefit payments to participants. But there are legal limits, adjusted each year, on the maximum benefit guaranteed by the PBGC. For plans ending this year, people retiring at age 65 can receive up to $4,653 a month. And workers don't accrue additional benefits after a plan terminates. For participants in underfunded plans that threaten to terminate, all this adds up to a lot of uncertainty. Beverly Moncrief, 53, of Fort Worth, Tex., took early retirement from American Airlines in late 2010 because of chronic health problems. American parent company AMR Corp. filed for bankruptcy about a year later, and in February said it would seek bankruptcy court approval to terminate its pension plans. Those plans are underfunded by about $10 billion, and retirees would lose $1 billion in benefits if they were terminated, according to PBGC estimates. That left participants like Moncrief waiting nervously. She expects to start receiving a pension at age 55 in 2014, she says, "hopefully, if all this pans out." In early March, American told workers that it would seek to freeze pension plans for non-pilot employees instead of terminating the plans, allowing workers to maintain the full value of benefits earned before the freeze date. Workers can check their plans' funding level by reviewing the annual funding notice, which plans must provide to participants each year. The notice must show the plan's funding percentage, a statement of assets and liabilities, and information on the plan benefits that are eligible to be guaranteed by the PBGC. If you notice a drop in your plan's funding level, "don't panic," says the Pension Rights Center's Davis. Because plan assets are invested for the long haul, she says, "there are going to be years of ups and downs." Funding levels affect payout options. A single-employer plan that is between 60% and 80% funded can pay out only half the benefit as a lump sum, with the remainder paid as a lifetime monthly annuity. And a plan that is less than 60% funded can only pay a benefit as an annuity. As employers aim to trim pension liabilities, many more participants may be offered lump sums. The move can save the employers money, in part because having fewer participants in the plan helps reduce PBGC premiums and administrative costs, says Jonathan Barry, partner at Mercer. But lump sums aren't always the best choice for participants. Fuzzy math. Don't assume that your pension administrator is particularly handy with a calculator. Benefit calculation errors are common, pension experts say, and workers should regularly check benefit statements. Although plans are required to give participants individual benefit statements every three years, workers can request these statements annually. The statements show the total benefits earned, how much is vested and special restrictions, such as whether Social Security is subtracted when calculating the benefit. Check that the statement accurately reflects your number of years of service and any contributions that you've made. If your benefit statement shows a big discrepancy from one year to the next, "that's a big red flag that there's a calculation issue," the Pension Rights Center's Davis says. You can ask your plan administrator to show you the numbers that went into the calculation. You can also review the summary plan description, which should include the requirements for earning benefits and how the benefits are calculated. Participants should be on guard for calculation problems even if the math error seems to be in their favor, Davis says. If you've been collecting a pension for years, a plan that finds you've been overpaid may suddenly demand repayment or slash your monthly benefit. Given the complexity of benefit formulas, it may be very difficult to challenge a benefit calculation on your own. The pension counseling projects listed on the Pension Rights Center's Web site can help resolve such disputes. These projects serve 29 states, and people who are not residents of those states can still receive assistance if their company or plan has offices in the state or if they lived in that state while earning the pension. Alternatively, visit www.pensionhelp.net, which will refer you to pension assistance groups based on your location and employment.