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Lessons for Retirees From Kodak’s Bankruptcy

Kodak’s bankruptcy filing this week is a tough blow for the 63,000 workers and retirees covered by the company’s two traditional pension plans, some of whom may no longer receive their full pension benefits. But are there lessons for other Americans who are still enrolled in company pension plans?

Judging by the latest figures from the Pension Benefit Guaranty Corporation, which insures private-sector pension plans, Kodak retirees and workers aren’t the only ones facing possible reductions in their benefits. In fiscal year 2011, 152 underfunded private-sector pension plans shut down, and about the same number terminated in 2010. The Pension Benefit Guaranty Corporation does insure private-sector pensions, so for current retirees, even if their pension plan shuts down, they’ll continue to get the income they were promised, just from a different source.

But the PBGC guarantee on benefits is capped, meaning the highest earners may find their expected income reduced, says Jack VanDerhei, the research director at the Employee Benefit Research Institute. For example, someone whose pension plan terminates this year and who retires at 65 would see their monthly benefit capped at $4,653.41. “The maximum insured amount is going to cover most people’s benefits,” VanDerhei says.

More bad news for the nearly 42 million people who were covered by 47,000 defined-benefit pension plans as of 2009, the most recent government data available, say experts: More plans are expected to shutter in the coming years. For those retirees or near-retirees relying on pensions, experts say to be prepared for a worst-case scenario. “Only one company out of the original Dow Jones index survives to this day,” notes Mark Zupan, the dean of the Simon School of Business at the University of Rochester. “One of the fundamental insights for finance is you want to have a diversified portfolio, so banking on one particular company continuing to succeed in perpetuity is generally not a good strategy,” he said.

Workers who are still a few years from retirement should save additional money outside of a pension plan if possible, say advisers; if the plan shuts down before they retire, they won’t accrue as much income as expected. Workers should also consult a financial planner to determine how much money they’d need to save to cover their expected benefits, should they be cut, VanDerhei says. “It’s going to get more and more difficult the longer you wait,” he says. For example, a worker who had expected to accrue a benefit worth roughly $36,000 a year whose plan was frozen 15 years before her retirement date might see that expected benefit reduced to roughly $13,500 a year, according to VanDerhei’s research. To make up the difference by buying an annuity, she’d need to save almost $300,000 in her 401(k) plan.


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