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What Happens to My Pension if My Company Goes Bankrupt?

Have you ever wondered what will happen to your pension if your company goes bankrupt?

It may seem like a distant possibility, which is possibly why you haven’t considered it before. But in 2018, a wide range of companies filed for bankruptcy – including Toys R Us, Sears, David’s Bridal, and others. The truth is that bankruptcy at a corporate level happens, and so it’s best to be prepared in case you’re ever in a situation where you’re at risk of losing your livelihood, benefits, and your retirement savings due to your company going bankrupt.

Is the Money Gone?

Nothing is ever has a straightforward “yes” or “no” answer in the world of finance. Wondering what happens to your pension if your company goes bankrupt is no exception. Your money isn’t necessarily gone – but you’ll have to do some digging to find out exactly what you can expect.

In a perfect world, a majority of your pension benefits are protected by the Pension Benefit Guaranty Corporation (PBGC) – a federal insurance organization that takes over your pension payments if your company can’t make them. However, there are some cases when your pension isn’t protected. Recently, an example of this can be found with Marsh Grocery.

In a rare case, Marsh Grocery wasn’t participating with the PBGC. Most companies are insured by the PBGC, but when they’re not, pensions aren’t necessarily protected against financial disaster. The Midwest grocery chain went under in 2018. Before that, they were bailed out repeatedly by Sun Capital, a financial organization who invested substantial capital in keeping Marsh afloat. When the company finally went bankrupt, Sun Capital had no intention of paying back employee pensions.

As the company began its slow decline toward bankruptcy years ago, Sun Capital started to invest revenue back into the grocery stores themselves – including massive renovations and updates. They also discreetly started selling off the company in smaller sections, all while still investing in other companies and continuing to earn money. Sun Capital started to short pensions to fund other investments in Marsh – leaving many employees without a pension. In fact, some retirees have already started seeing cuts in their pension checks. 

Safeguards Against Losing Your Pension

This situation seems scary, and rightfully so. How can a retiree feel confident about retiring knowing that incidents like this happen?

The good news is that there are a few safeguards in place to protect you pension. First and foremost, the PBGC actively works to protect American employees against losing their pensions – even if a company goes bankrupt. The PBGC states that it currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans.

However, just because the PBGC is looking out for your pension doesn’t let you off the hook. After all, this is your life, your money, and your retirement. It’s critical that you take steps to secure your pension if you start questioning whether or not your company is going to go bankrupt. Despite how it may feel, you’re not powerless in this situation. Although your pension is technically directly connected to your company, the money in it is, for all intents and purposes, yours. Here’s what you can do to start protecting your pension on your terms.

What You Can Do

The #1 way to protect your pension is to get proactive. Start by finding out if your pension is guaranteed or not. Not everyone’s company participates in the PBGC, which could mean that your pension isn’t insured by them in case of financial crisis. However, this isn’t common. What’s more common is that the PBGC caps how much of your pension is insured – which could mean only a portion of it is guaranteed if your company faces a worst-case financial scenario and has to reduce benefits.

It’s also wise to ask for a plan statement that shows exactly how much of your vested pension you’re entitled to upon retirement. This gives you a clear idea of what you can expect, and may help to raise some valuable questions about your plan that will help you understand it more clearly.

Your next step is to take your annual funding notice to a financial planner who can give you guidance about what’s going on in your plan. They’ll be able to highlight what investments in the plan are doing well, or whether it matches your risk tolerance according to your unique financial goals.

Finally, if you’ve recently retired, haven’t started pension benefits yet and want to avoid having your pension reduced should your company go bankrupt after you retire, you might consider going one step further and removing your pension from your company altogether. If you forego a monthly payment from your pension, you can take a lump sum payout and roll the entirety of the funds in the pension to an IRA. This gives you more control over the funds in your pension, and can help to remove your unstable company as a potentially negligent middle man standing between you and your financial security during retirement

Working With An Advisor to Explore Your Options

Rolling your pension to an IRA might not be your best option. Coming up with a strategy to protect your pension is very specific to your unique goals and financial situation. Working with an advisor can help you to develop solutions that are specific to you, your company, and your pension plan.

Want to know more? Have questions? Contact me today to schedule a consultation. I’d be happy to help walk you through how your pension plays into your retirement strategy, and what you can do to start securing it.