The news that three of the nations financially strapped air carriersUnited Air Lines, Delta Air Lines and U.S. Airwaysare threatening to jettison their employee defined benefit plans has a lot of baby boomers asking questions about their own companies pension packages. How should advisors counsel them?

“Plan for the worst,” says Melody Juge, founder of The 401(k) Choice, Los Angeles, Calif. “We have only to look at what happened with Enron, WorldCom and Arthur Andersen to know that the impossible happens.

“Those boomers who have a defined benefit plan should generally ignore it,” she adds.

Other advisors are not so categorical as Juge. But those interviewed by National Underwriter agree that producers should advise boomers who are expecting a pension to nonetheless amass savings through personal retirement accounts, if not through a 401(k) or other defined contribution plan, then through an IRA, Roth IRA or annuity.

Not all boomer clients are so easily convinced. Nicole Winter Tietel, president of Winter & Associates, St. Paul, Minn., says she frequently will ask prospects who have a false sense of security how much financial information theyve received about their companies internally and what theyve learned through the media.

“If they say, Ive only heard information through the media, then that should raise some red flags,” says Tietel. “I ask these questions to help them realize for themselves that they should be concerned.”

Irrespective of the employers or pension plans financial health, boomers need to build personal retirement accounts because the pension in most cases wont cover full retirement expenses. Defined benefits for even long-time employees might only total 25% to 30% of final pay, according to Charlie Clark, a senior vice president at Aon Consulting, Somerset, N.J.

Consider, too, that the amount of money employees need to retire is rising. A study released this month by Aon Consulting, Chicago, Ill., entitled “Aons 2004 Replacement Ratio Study,” finds that workers earning $20,000 and $90,000 per year will need, respectively, as much 89% and 78% of these per annum amounts after retirement to maintain their standard of living. These figures compare with 83% and 75%, respectively, for the workers earning equivalent salaries 3 years ago.

To ensure they have a foundation to build on, many employees at companies teetering on bankruptcy are opting for early retirement, enabling them to take their pension as a lump sum distribution, rather than a monthly payout. Prime example: Delta Air Lines.

Since the Atlanta, Ga.-based carrier warned earlier this year that it may have to file for Chapter 11, 434 pilots have opted for early retirementforcing Delta to take a $117 million charge in the second quarter. Another 2,000 Delta pilots are eligible for early retirement; roughly 600 (or 8% of Deltas 7,500 pilots) have enough years of service to make the pension payout worthwhile, according to Air Line Pilots Association spokeswoman Karen Miller.

Given that most of the Delta pilots (generally boomers) also have significant balances in 401(k) plans, are they wise in taking early retirement? Tim Chapman, principal and co-founder of PMFM, Athens, Ga., and an advisor to many of the Delta pilots, says yes.

“If the company files for bankruptcy, even though the pension plan may not terminate, they lose the option to take part of the benefit as a lump sum,” he says. “By taking the lump sum, the employees can take control of their destiny. They can replicate, on their own, the monthly [annuity] they would have gotten through Delta.”

That, adds Don McCoy, president of Planners Financial Services, Minneapolis, Minn., may be the best way to manage the payout.

“Id be loath to tell a client to get rid of that income stream,” says McCoy. “I feel totally capable of managing my clients money. But I would be putting them at risk by taking away one of the legs of their stool [the monthly annuity] and bringing it all to me to manage.”

Prospective retirees who choose to stay with their firms can lose more than just a lump sum option. The Pension Benefit Guaranty Corp. (PBCG) guarantees recipients a payment of $3,300 per montha fraction of what they might earn under a fully funded plan.

Adding to the uncertain picture are questions over how employers will need to value future pension obligations. The Pension Funding Equity Act of 2004, which Congress passed last April, sunsets at the end of 2005.

The act changed the interest rate that pension sponsors must use for calculating defined benefit plan funding requirements. Currently, sponsors use the yield rate of corporate bonds, which is less onerous than the previous benchmark, the 30-year Treasury bond rate.

Regulatory issues aside, should the boomer client who has, say, a 50% expectation of receiving a pension contribute as much into a personal retirement account as the boomer who has no such expectation?

Tietel thinks so but concedes the outcome in each case may be different. “The second person may be more easy to convince and 50% more likely to save than the individual who may be getting a defined benefit,” she says.


Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.