How Retirement Plan Funds are Protected from an Unpredictable Economy

If you’ve had an employer-sponsored retirement plan for awhile, you probably scrutinize the statements you receive in the mail a little more than you did a few years ago.

Like many Americans, you may question what’s behind the numbers on your statement, and how likely it is that your pension or 401(k) benefits will remain intact.

Before you make decisions based on these legitimate concerns, it’s worth taking a closer look at your employer-sponsored retirement plans to see what safeguards are in place to protect your benefits against negative economic conditions.

ERISA protects funds paid into retirement plans
For any retirement plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA)—such as a pension plan or 401(k) plan—the law dictates that employers keep the plan assets separate from its operating funds. This can be done through a trust or an insurance contract.  By doing so, the plan assets are protected should your employer or a third-party plan administrator go bankrupt, lose a lawsuit, etc. ERISA requires plan assets to only be used for the benefit of the plan’s participants and beneficiaries.

ERISA also established the Pension Benefit Guaranty Corporation (PBGC), which guarantees payment of pension benefits you’ve earned in a defined benefit plan. Other retirement plan types such as defined contribution plans including 401(k), money purchase, profit sharing plans etc. are not covered by PBGC. Benefits for any defined benefit plan are guaranteed by the PBGC, up to certain limits. In 2010, the maximum annual benefit provided by PBGC is $54,000. Employers pay premiums each year to the PBGC.

Employers have fiduciary duty to choose reliable plan administrators
Beyond ERISA’s requirement to separate retirement plan contributions from general operating funds, it charges employers with the “fiduciary duty” of administering its plan prudently, says Dave Fowler, Lead Attorney for CUNA Mutual Group’s Retirement Plan Services. This duty includes exercising due diligence in choosing a third-party partner to invest the plan’s assets and/or provide administrative services such as recordkeeping, documentation, and employee education.

“Employers really need to do their homework to ensure they’re choosing third-party providers with long-term stability and quality operations,” Fowler says. “For example, if you’re working with an insurance company, you should know its history of ratings from A.M. Best, and you should know that the company has the surplus to meet its obligations.” (See sidebar.)

State funds protects some insurance products
“If an employer plan offers certain guaranteed account options such as a Stable Value account or a Guaranteed Investment Contract (GIC), the insurer’s stability is the best indication that the product will generate the projected returns or be able to make monthly annuity payments,” Fowler says.

However, individual states also maintain a “guaranty association” that collects premiums from all insurance companies doing business in that state, Fowler notes. If an insurer becomes unable to meet its obligation to state residents or businesses, the guaranty association uses this fund to cover the failed insurer’s obligations of qualifying accounts.

For more information:
If you have questions about the economy’s effect on retirement plans—and what you can do to protect your retirement assets—download these basic guides free from CUNA Mutual:

Volatile Markets and Your 401(k) Plan

Volatile Markets and Your Defined Benefit Plan

Eight Timeless Investment Strategies

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