Anticipating The Demise Of Private Defined Benefit Plans And What Can You Do About It?

The newspapers and the weekly magazines are filled with the financial dilemmas being encountered by the auto and airlines industries and their astronomical defined benefit pension plans (monthly pension) deficits, but, they are not alone. Just about every major company with a defined benefit plan is suffering, or will suffer the same fate. Many companies are applying smoke and mirror or band-aid fixes, but they are temporary at best. The truth is in the in the global economy these rich, post-retirement benefits are unsustainable – and everybody knows it.

So how do you, the practitioner, come to grips with these new realities? For one thing we should rethink the use of the pension appraisal as a viable distribution tool. Only in the case of public pensions will defined benefit pensions probably be around for the long haul. Most of companies who compete on the world markets will have to abandon them as a means of economic survival.

In some ways it is easier. Over the past 20 years many private companies have abandoned traditional pensions in favor of 401(k) plans or other retirement savings schemes. If both the husband and the wife work in the private sector, and have a form of retirement savings benefits, dealing with two defined contribution plans is relatively easy. Whomever has the larger account balance owes 50% of the difference (assuming it is all marital) to the other partner. Distribution can be handled by offset against another marital asset or by use of a Qualified Domestic Relations Order to either transfer the difference to the other partner’s retirement account or distribute the funds immediately.

Because the fate of the defined benefit plan will be so speculative over the next 20 years, what I advocate is a gradual transformation to the Qualified Domestic Relations Order as the principle tool to be used the distribution of marital retirement assets. This eliminates much of the guesswork as to whether a plan will survive and, if properly drafted, can insure an equitable distribution.

The difficult part is to know how a company’s defined benefit plan will be changed. The present value of the accrued benefit of the plan could be computed and become the opening figure for a Defined Contribution Plan (401k, et al) or it could become the opening figure for a Defined Benefit Savings Plan or an ESOP. The possibilities, while not endless, are myriad. The company might just might just freeze the benefit and eliminate other retirement benefits all together and simply give the employees raises and tell them to establish their own I.R.A.’s,

With this many potential operating models, it will be incumbent on you, the attorney, to cover every contingency if you want to protect your client, while addressing the standard defined benefit plan if the company elects to stay with that model. I know this seems difficult but if you want to really protect your client there is really no other way to do so this than by immediate offset and then you run into another problem – how willing would a pension holder be to do an immediate offset if he thought his or her defined benefit pension was in jeopardy and if he or she lived in a matured full benefit state (pension is valued based on continued employment and retirement is projected to the earliest unreduced retirement date). He or she would be convinced they were giving away something they would never get unless they were very close to retirement age.

Think about this, and I think you will see we all have little choice in the matter. To protect the client we have to transition from Pension Appraisals to Qualified Domestic Relations Orders as the retirement asset distribution tool.