Question: Is it true that the federal government insures retirement plans?
Answer: Not exactly. You’re probably referring to something you heard called the Pension Benefit Guaranty Corporation (PBGC) which is a federal agency created by ERISA.
PBGC insures certain pension benefits, specifically defined benefit plans, but not other types of retirement plans.
To explain it a bit further:
- A defined benefit plan is a qualified employer pension plan that promises to pay a specific monthly benefit at an employee’s retirement. The burden for funding this is on the employer.
- A defined contribution plan is a qualified plan in which employees have individual accounts to which they can make contributions from their payroll. A defined contribution plan doesn’t promise to pay a specific dollar amount. Examples of defined contribution plans include 401(k) plans and profit-sharing plans.
While the PBGC insures most defined benefit plans, it doesn’t insure defined contribution plans.
To find out if your defined benefits plan is insured by the PBGC (provide you have a defined benefits plan) ask your employer or plan administrator.
In general, though, if you have a defined benefit plan it typically will be covered unless it meets an exception. Plans not covered include church groups, state and local governments, and those belonging to professional service corporations with fewer than 26 employees.
In the event you employer’s defined benefit pension plan is to be terminated, you’ll receive notification from your plan administrator and/or the PBGC.
If the PBGC takes over a pension plan because the employer doesn’t have enough money to pay benefits owed, the PBGC reviews the plan’s records and estimates what benefits each person will receive.
The PBGC guarantees that you’ll receive basic pension benefits up to a certain annual amount. but it may be lower than what you were originally slated to receive. Types of benefits guaranteed include the following:
- Pension benefits at normal retirement age
- Most early retirement benefits
- Disability benefits for disabilities that occurred before the plan was terminated
- Certain benefits for survivors of plan participants
For more information, visit the Pension Benefit Guaranty Corporation’s website at www.pbgc.gov.