Taking Care of Mom and Dad: Pensions Introduction

y father was an engineer. He worked for the same company for almost 20 years, before it was bought out by another. And then that one merged with another. My dad went over to GE for the last few years he worked. He retired over 10 years ago and is having a hard time making ends meet. I've asked him if he has any pension due from his first company, but he doesn't know...and gets defensive about not knowing. I've done all I can to unearth his lost pension -- talked to useful contacts, spoken with the IRS -- to no avail. My father could really use this money now, and I don't think it's fair that, after all those years of hard work, it's gone missing.

Pensions are the oldest form of retirement income plan. More than 80 million Americans participate in some form of private-sector pension plan and about 14 million draw monthly retirement benefits.

You may have heard the term defined benefit plan, which is the technical term for a traditional pension. Some firms refer to plans by other names. Whatever the term, the idea is the same: In defined benefit plans, employers set aside money in some form of trust account for their employees' retirement. The money that the employees can take out later is based on a formula (and is, therefore, defined); the amount of money that the employer has to put aside to cover those benefits is determined by rules set by the government.

The specifics of any plan can change from company to company and from year to year, depending on factors that range from the size of the company to how aggressively it invests the money put aside for the employees.

For example, your dad may be entitled to receive 1½ percent of his salary for each year he worked at a company, payable monthly after he retires. If he worked for 25 years, he could retire and count on a pension benefit equal to 37½ percent of his average pay.

Plans may state the promised benefit as an exact dollar amount (for example, $250 per month at retirement) or may specify a formula for calculating the benefit (for example, $20 per month for every year of service with the company or a percent of a worker's salary times years of service).

The employees are not taxed on the amounts that employers contribute to find their pension benefits; and the employers get to deduct those amounts from their taxes. And the trust accounts aren't taxed on profits they earn while the money is put aside. However, the employees do have to pay income tax on the retirement money when they receive it.

Because these plans are costly and difficult to manage, not many employers sponsor traditional pensions today; instead, they use lower-cost alternatives like 401(k) plans.

But many larger employers and most government agencies still offer traditional pension plans. If your parents spent a significant part of their careers working for a big corporation or the government (including the military), the odds are that they have earned a substantial pension benefit.