Pension Participants Unaware of Plan Vesting and Payouts

By Stephen Miller, CEBS Aug 5, 2011
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Participants in private-sector defined benefit pension plans showed a widespread lack of awareness about how those plans work and how much income they might eventually receive from the plan after retiring, according to a survey by Fidelity Investments of more than 500 U.S. corporate employees nationwide who participate in employer-sponsored pension plans, fielded in May 2011.

Plan participants said that they:

  • Did not have detailed knowledge of how their pension plans operate (71 percent of respondents), yet more than half said they are counting on those pensions to help pay for living expenses in retirement.
  • Didn't know their plan’s vesting schedule (31 percent).
  • Didn't know what their payment options will be on retiring or when leaving their company (40 percent).
  • Didn’t know at what age they can begin to receive payments (27 percent).

“Corporate pension plans remain a critical component of retirement income for millions of Americans,” said Wendy Foster, senior vice president in Fidelity’s defined benefit business. ”Our research highlights an opportunity for companies to better educate their employees about the value of employer-sponsored pension plans [and] to help workers understand and manage their pension plans and decide how these assets fit into their overall retirement strategy.”

The majority of those surveyed (61 percent) said they had never inquired about how much money they will receive after retiring. When asked to explain their passive approach to determining the monetary value of their pensions, 43 percent said they relied on their employer to provide the information when necessary and more than one in four (29 percent) said they lacked knowledge about the plan or they didn't know whom to ask for information.

Reliance on Pensions Is High

On average, participants expected their pension benefits to supply almost one-quarter of their retirement income, the survey found. Most (56 percent) said they will rely on their pension payouts to cover living expenses during their retirement years, rather than as “extra” money for expenses like travel or hobbies.

Among pension plan participants, the breakdown of expected sources of income in retirement, on average, was:

  • Defined contribution plans (27 percent).
  • Social Security (26 percent).
  • Savings/other (24 percent).
  • Defined benefit pensions (23 percent).

Payout Decisions Loom

Most participants (56 percent) said they expected to receive annuitized payments from their plans when they retire. Just 10 percent plan to take lump sum payments, and 9 percent expect a combination of a lump sum payment and a form of annuity.

One-quarter of those surveyed said they don’t know how they will be paid. Among those surveyed who plan to receive only annuitized payments, the median expected amount is $1,500 a month. The median expected lump sum payment is $95,000.

Learning About Their Plans

Employers can help employees to become better informed about their plans, according to Fidelity, by providing:

  • A participant’s estimated pension payout based on an assumed retirement age.
  • A summary description of their pension plan with information such as how the plan calculates benefits and when participants can initiate their payments.
  • Their vesting status or the percentage they are vested in the plan.
  • A modeling tool to calculate different payout estimates based on retirement age.

In addition, education materials should outline the basics of pension payments (annuity payments, lump sum payments or a combination) and should explain the advantages and consequences associated with each payment type, including the tax implications and advantages of each payment option.

“Understanding your pension benefits is an important part of developing an accurate income plan for retirement,” said Foster. “There are many key areas that need to be addressed and analyzed, including vesting status, preferred payment method, estate planning and the tax implications of any action.”

 

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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