Pension Protection

published 28 February 2007

Are cash-balance pension plans protected if the employer goes bankrupt?

Yes, they are insured by the Pension Benefit Guaranty Corp. Cash-balance pensions resemble 401(k)s in that you have an account that builds until you retire or leave the company. Usually, you're credited with a percentage of your pay each year and earn a fixed or variable interest rate. Unlike 401(k)s, though, you don't contribute your own money or direct the investments. The company is obligated to pay the benefit that you're due. If the employer terminates the plan for lack of money, the PBGC will assume trusteeship and pay benefits within certain limits. The maximum annual benefit in plans terminating in 2007 is $49,500. The PBGC cannot guarantee more than what your firm pays at normal retirement age (in other words, it won't support early-out inducements), and it won't guarantee benefit increases made within five years of the plan's termination. Recent court decisions and provisions in the pension-reform law enacted last year make it likely that more firms will adopt cash-balance plans.

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Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.