Protecting Your Benefits after the Pink Slip
By Ellen Hoffman
Sometimes layoffs are implemented so swiftly employees barely have time to clean out their desks, let alone sort out their retirement benefits. But once you're off the payroll and out the door, you risk administrative hassles -- and even worse, loss of some retirement benefits you were counting on -- if you're not careful.
"Employees aren't thinking about retirement plans at all when they get laid off," says Valerie Federickson, whose Menlo Park (Calif.) executive-search firm works with many victims of Silicon Valley's high-tech slump. "Often I see [laid-off] job candidates who spend [all this] time negotiating an extra two weeks' severance pay or good references when they should be focusing on their stock options or their 401(k) money," she says.
KNOW YOUR RIGHTS.
So, what can you do to protect your hard-earned retirement benefits when the pink slip lands on your desk? The first thing you should do is make sure you have complete, up-to-date information about your future benefits. Private-sector employers are required by the Labor Dept. to provide you with certain information about your plan. To get a general overview of what you have a right to know, read "Protecting Your Pension and Health Care Benefits after Job Loss" at the department's Web site. Go to www.dol.gov/dol/pwba, and click on "publications" and then the name of the document.
But a lot of the information you'll need is in your company's Summary Plan Document, which describes how your benefits are calculated, when you become vested, when you may receive your benefits, and in what form. If you don't already have a copy of the SPD, get one from your company's benefits office.
If you have a traditional ("defined benefit") pension based on a formula that includes your years of service and salary level, you probably won't be able to receive any benefits until you reach the retirement age specified in the plan.
But to avoid losing track of your benefits or having to research them years later, when it could be much more difficult, experts recommend you request an "individual benefit statement" on the status of your own pension by writing to the pension-plan administrator. Steve Platt, an employment attorney with Chicago law firm Arnold & Kadjin, says it's crucial to request your statement in writing from the plan administrator -- whose name you should find in the SPD -- not from a company official. "A lot of administrators are outrageously inattentive to requests for information," he warns, suggesting you reinforce your legal claim to the information within 30 days.
Information you should specifically request: the status of your pension, when you're eligible to retire, and an estimate of how much your pension will be. Also ask for copies of all pension-plan documents, including the "trust documents" showing how it's administered, and copies of all benefits statements in your file. Send the written request in a certified, first-class letter. In the letter, remind the plan administrator that the Labor Dept. can fine the plan $100 per day if the administrator doesn't respond within 30 days.
Traditional pension plans that terminate because of bankruptcy or mergers are taken over by a federal agency, the Pension Benefit Guaranty Corp., which actually pays the pensions to former employees. If this applies to you, check out its Web site at www.pbgc.gov.
401(k)s and similar plans: Again, you should read your SPD and get an individual benefit statement immediately. But if you have a "defined contribution" plan to which you and your employer contribute, you may face more complex decisions that will have to be made immediately about this nest egg. And you could encounter a nasty surprise: If you haven't worked for your employer long enough to be vested -- say, five years -- you'll have a right only to your own contributions and their earnings, not to the employer's match.
While the fine print in the SPD will determine specifically what your choices are, these are the basic ones:
Take out the money and spend it. If you're younger than 59 1/2 years old, the consequences will be costly: You'll pay a 10% penalty to the IRS and income tax on the full amount. Even worse, you'll lose the long-term value of compounding your savings.
Roll the money over to a retirement account with a new employer and avoid penalties and taxes. If you have less than $5,000 in assets, your old employer may require you to take the money, but to do so, you may have to cash out some assets. Also, your new employer may not allow you to hold certain mutual funds or stocks that were in your old account. There could be a conflict of interest with specific companies' holdings, and retirement plans usually limit your investment options, e.g., to a particular group of mutual funds.
If the market is down when you leave your job, you may want to postpone a cash-out until your returns are higher. If your former employer lets you leave the money where it is, do so.
- Roll the account over to an IRA. To avoid penalties, you must follow strict rules requiring that the assets go directly into the IRA -- not to a bank or other account first -- and that the transaction be completed within 60 days after you receive the money.
If you roll your money from a 401(k) or similar plan into a Roth, you must pay taxes on the money when you take it out of your pension plan. There will be no taxes on it when you withdraw it from the Roth (as long as you are over 59 1/2).
Also, if you exceed the income limits of $110,00 for an individual or $160,000 for a married couple filing jointly, you can't roll the money into a Roth IRA. You would instead have to put it in a traditional IRA.
If you roll your money from a 401(k) or similar plan into a traditional IRA, you won't pay taxes on it that year. You'll only pay income tax on the money you withdraw from the IRA after you retire. But if you're doing a rollover from your 401(k) or the like, you aren't subject to the standard $2,000 contribution ceiling for the year.
KEEPING YOUR MONEY SAFE.
Mary Ellen Signorille, an AARP staff attorney who works on employment issues, emphasizes that you should evaluate your big financial picture before deciding what to do with retirement money. "You need to look at your financial situation to see what steps you must take to cover your daily-living expenses, as well as what you need to do to keep your retirement money safe," she advises.
Signorille says you should review all your assets and potential family income -- say, from a working spouse -- to determine if it's enough to support you until you find another job. If you discover you'll need cash to pay bills in the post-layoff period, consider options other than taking it out of retirement accounts (for reasons cited above). You might end up spending less money, for example, by taking out a home-equity loan to pay the bills for a while.
There's also one more issue to think about, according to Pete Shearer, an employment lawyer in San Mateo, Calif. If you're 40 or older, you should "explore whether age was a factor" in the layoff. If you're forced to leave a job before meeting minimum requirements for vesting or for receiving your full pension, he says, you could lose "hundreds of thousands of dollars" in benefits over your retirement years. It's against federal law for a company to lay off employees just because it wants to replace them with younger, lower-earning workers who won't claim their pension for decades. For information on how to identify age discrimination and your legal options, visit the Equal Employment Opportunity Commission's Web site, www.eeoc.gov/facts/qanda.html.
Since it's often difficult to think clearly after a layoff -- especially if it comes as a surprise -- it's wise to be on top of your retirement benefits. That way, you won't be scrambling for answers when you're distracted and not at your best. The information is also useful to have if you're thinking about changing jobs. And if you hadn't done any financial planning for retirement before you were laid off, it's an ideal time to start.
Hoffman writes Your Retirement twice a month, only for BW Online
Edited by Patricia O'Connell