Job Security and Your Retirement Plan

The answer depends on how long you worked for the company, the amount you saved up and whether the money’s in a 401(k) or a pension plan.

For the most part, federal regulations protect retirement savings, even if a company goes belly up – which may come as a relief to many given today’s shaky economic landscape. Since the start of the recession last December, the number of unemployed people in the country has increased by 2.7 million, to 10.3 million.

In case you’re worried about your job security, here are some questions and answers about your company-sponsored retirement account.

Q: Do I get retirement benefits if I’ve only been with the company a short time?

A: Companies typically have a “vesting period,” meaning you need to be employed a minimum amount of time to be entitled to certain benefits. With 401(k) plans, the requirement is often three years.

If you’re laid off before then, any matching contributions by your employer may be taken back, said Chris Mahoney, a retirement leader at Mercer, a human resources consulting firm.

If you’re not vested yet and want to know how much money could be reclaimed by your employer, check your monthly 401(k) statement. Employer contributions to date should be listed separately.

Any money you put into the account is yours, even if you haven’t reached the vesting period.

With pension plans, the vesting period can be no longer than five years, and may be less. If you aren’t vested at the time of your layoff, you’re out of luck – you don’t get anything. Though some plans vest workers in stages: For instance, workers may be 25 percent vested after two years and 50 percent vested after three years and fully vested after five years.

Q: What happens to the money in my 401(k) or pension after I’m laid off?

A: If you have less than $1,000 in your account, the company can hand the money over to you. Unless you notify them of your preference within 60 days, it can write you a check or roll the money over into an IRA under your name.

For amounts between $1,000 and $5,000, the company can roll the money over into an IRA, but cannot make a cash distribution without your consent.

For 401(k) accounts valued at $5,000 or more, the company can’t touch the money without your consent. The money stays in place unless you request otherwise.

For pensions worth more than $5,000, some companies may pay lump sums. Otherwise, you’ll start getting payments when you reach the plan’s retirement age, usually around 65, said Dallas Salisbury, president of the Employee Benefit Research Institute.

If you’re not getting payments until retirement age, it’s important to keep former employers up-to-date on address changes. Companies are required to file pension records with the Social Security administration, but it’s still possible your contact information may be lost, Salisbury said.

Q: Should I take a lump sum or keep it in a retirement account?

A: If you cash out a 401(k) or pension, it’s subject to income taxes and a 10 percent penalty if you’re not yet 59 1/2. So it’s to your advantage to roll the money over into another retirement account, such as an IRA. If you find a new job, some companies let workers roll over money from past retirement accounts into current 401(k) accounts.

Q: What happens to my pension if my company goes under?

A: Pensions offered by private employers are typically secured by a federal agency called the Pension Benefit Guaranty Corp.

The PBGC ensures pension payments, but you may not get the full amount your employer promised. Each year, the agency issues a cap on benefits it pays out to retirees – next year’s annual cap is $54,000.

Gary Pastorius, an agency spokesman, said about 35 percent of retirees get reduced benefits because of the cap. Payments may also be scaled back if an employer’s plan sets retirement age earlier than 65.

The PBGC only distributes lump sums for $5,000 or less, Pastorius said. For greater amounts, you’ll get annual payments once you’ve reached retirement age.

“Professional service” companies such as law firms or medical practices with 25 or fewer workers usually aren’t covered by the PBGC.

Under federal regulations, these businesses are still required to maintain certain funding levels for pensions. But if the company goes under, retirees may not get their full benefits or as much as they would if the pensions were covered by the PBGC, said Craig Copeland, a researcher at EBRI.

Q: What happens to my 401(k) if my company goes under?

A: Your 401(k) is protected even if your company goes out of business.

Government regulations require 401(k) funds to be held in a trust separate from employer accounts and from the companies that manage 401(k) plans. The trust funds are overseen by investment managers, and they carry insurance designed to help protect a company from a fraudulent loss due to embezzlement or other misconduct.

As with a layoff, the money may be distributed either as a check or rolled over into an IRA. If you’re not yet vested, promised employer contributions may also be forfeited under a bankruptcy.

Some of your 401(k) might be at risk, though, if your company’s matching contributions are in the company’s own stock – those shares become worthless if the company goes bankrupt.

Copyright 2008 The Associated Press.