What to do when your pension is frozen

(Money Magazine) -- You've been looking forward to retirement -- and the steady income your employer was supposed to provide -- only to learn that your company has frozen its pension plan. Now what?

You're joining a well-populated club: Overall, about a fifth of workers in private-sector pension plans -- 3.3 million people -- have been affected by a "freeze," or suspension of benefits, according to the Bureau of Labor Statistics.

Kraft, HSBC, and Time Warner (the parent company of CNNMoney.com and Money Magazine) are among the large employers to have frozen plans this year, following 190 Fortune 1,000 companies in 2009.

Industries such as aerospace, defense, and natural resources -- along with state and local governments -- are likely to offer defined-benefit plans for years to come, experts say.

But the firms that have frozen plans aren't likely to thaw them. So if your pension is iced over or at risk, you'll need to adjust your retirement strategy ASAP.

What a 'freeze' means. Unlike 401(k)s, which are funded in large part by employee contributions, a pension is paid entirely by the employer using a formula typically based on your years of service and highest pay.

A company might, for example, multiply 1.5% of your top salary by your tenure, meaning that if you worked 25 years and now earn $100,000, you'd get $37,500 a year.

Companies can freeze plans in one of two ways. Under a "hard" freeze, the pension is literally frozen. The benefit you've accrued as of today is what you'll get at retirement. "You don't accrue further years of credit, and your benefits are based on your salary at, say, 50 instead of 65," explains Alicia Munnell of the Center for Retirement Research (CRR).

A "soft" freeze is less severe -- your benefit still grows, but based on a new formula. The company generally doesn't allow you to accrue more years of service, and it may cap the salary it uses (taking a five-year average, say). Either way, your pension is worth much less.

Who it affects the most. If you're under 35, or have been with the company a short while, you probably haven't amassed much of a benefit. Also, firms that freeze pensions generally offer a new or enhanced 401(k)-type plan, and younger people have time to make the most of such offerings. Folks within five years of retirement are also not so bad off: You'll have accumulated close-to-peak benefits, says Munnell.

It's those in the middle who "get the worst of both worlds," says David Certner, legislative policy director for AARP. You lose the guaranteed income and "you don't have time to recoup your losses by joining the 401(k)."

Absent a freeze, if you'd been hired at 35 and stayed on until retirement, you could expect about 43% of your final salary at age 62, according to a CRR study. But if your company instead froze the plan when you were 50, and you immediately started contributing 6% of salary to a 401(k) plan with a standard 3% match, you'd be likely to get only 28% of your final earnings at retirement.

How to make up for it. First, contact the pension specialist in HR to find out exactly how much you're entitled to at retirement, says Falmouth, Mass., financial planner David McPherson. "Make sure you understand the rules," he says. Get details on any new or improved 401(k) match too.

Next, use the program at basic.esplanner.com to reassess your retirement picture, weighing projected income and savings against expenses. If there's a shortfall, you'll need to save more to cover it.

Even with only, say, 12 years to save, a sweetened 401(k) can help you make up time. In the standard plan noted earlier, if you contributed up to the match, starting at age 50 with a salary of $100,000 that rises 2.5% a year, you'd have $184,000 by age 62, given a 7% average annual return, says McPherson. With an enhanced dollar-for-dollar match up to 6%, you'd have $245,000.

Though it may not sound appealing, postponing retirement can also help you bridge the gap, says Newtown, Pa., financial planner Michael Garry. You generate more savings and reduce the number of years you need to rely on those savings. Besides, as with Social Security, delaying your pension until full retirement age (as set by your company) results in a bigger benefit.

Overwhelmed? You can find pension assistance locally via pensionhelp.org. But don't delay dealing with the issue. The sooner you take the reins, the more you stand to gain.

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