Mistakes in Retiree Pension Benefits Are Commonplace

When Gerry got his pension distribution, he knew something was wrong. The New Jersey resident was supposed to get $38,375 for his accumulated benefits from four years of textile sales at a manufacturing company. Instead he got only $19,000.

A year and nearly $4,000 in legal fees later, Gerry finally got the full amount--but he isn’t very happy.

“Why should I have to spend $3,970.40 on an attorney to get the money I was always entitled to?” fumes Gerry, who asked that his full name not be used. “I don’t know if this was an honest error or if it was intentional. But it’s ridiculous what I had to go through just to get what I was due.”

Gerry’s story is indicative of an insidious national problem, pension experts say. There are no national statistics, but pension actuaries and attorneys estimate that as many as a quarter of the nation’s retirees are not getting the pension benefits they’re entitled to, partly because of confusing and ever-changing federal pension laws. Also, the value of certain types of pension funds can be calculated in several different ways--and some tend to understate how much workers have saved.

Some workers lose tens of thousands of dollars as a result.

“The pension world has become immensely complicated,” says G. Patrick Byrnes, president of Actuarial Consultants Inc. in Torrance and past president of the American Society of Pension Actuaries. “Errors have become fairly common.”

Byrnes estimates that 15% to 25% of the defined contribution plans, such as 401(k)s and profit-sharing accounts, have errors. Somewhere between 5% and 15% of the defined benefit plans--in which the employer promises a set benefit at retirement based on years of service and salary--are incorrect, he adds.

Other pension experts estimate the error rate is somewhat higher. But, since there are no statistics, no one knows for sure. The one thing that most of the experts agree on is that mistakes are commonplace.

“I don’t know how many errors there are, but I am confident that there are a lot,” says Chester Salkind, executive director of the American Society of Pension Actuaries in Arlington, Va.

While some of the mistakes are small--simple typographical errors that add or reduce the pension benefit by just a few dollars--others can cost retirees tens of thousands of dollars, says Paul Holzman, co-founder of the National Center for Retirement Benefits in Northbrook, Ill.

Holzman says his firm is working with one retiree who discovered his lump-sum pension payment was $94,000 short. Another man’s company simply “lost” any record of his 20 years of employment.

Holzman says there are more than two dozen common pension errors, more than half of which can leave retirees with reduced payments. These include failing to include bonuses, overtime and commissions when computing benefits based on annual earnings; forgetting early years of service; miscalculating the value of plan assets, and using the wrong formula to calculate pension benefits.

Few companies cut workers’ payouts on purpose, experts note. Most errors are caused by Byzantine and continually changing federal pension laws, says Byrnes. The Employee Retirement Income Security Act, the nation’s pension rule book, has undergone five major revisions in the last eight years, Byrnes notes.

Worse still, the law is so intricate and interconnected that each change spurs dozens of official “interpretations” by the Internal Revenue Service and the Labor Department. The 1986 tax act, for example, resulted in more than 1,000 pages of pension rules--interpretations of the law--that trickled out over four years, Byrnes says. In 1990, the law was changed again. It was changed twice in 1992, then changed again in President Clinton’s Omnibus Reconciliation Act of 1993.

Pension administrators, particularly of smaller plans, simply don’t have the time or expertise to keep up, Byrnes says.

“The reason there are numerous errors is not because of evil; it’s because of the complexity of the calculation,” Salkind agrees.

For retirees, that’s troubling mainly because the law’s complexity makes it virtually impossible for laymen to find errors if they wait until retirement to look. Instead, those who suspect problems late in the game almost always have to hire professionals to ferret them out. And that can be expensive.

Pension actuaries commonly charge more than $200 to do a basic review of a defined benefit plan and between $500 and $1,000--depending on the complexity--to examine a defined contribution plan, Byrnes says. If you need to get a pension attorney involved, the costs can easily add up to several thousand dollars, says Stephen J. Krass, senior partner at the New York law firm of Krass & Lund and author of “The Pension Answer Book.”

Holzman’s company doesn’t charge anything up front, but if the firm discovers that you’ve been shortchanged, they’ll take half the amount of the error. In other words, if they discover errors that land you an extra $50,000 in pension benefits, you pay them $25,000.

Actuaries are lobbying to pass a law that would require defined contribution plans to be intermittently reviewed by independent professionals. But even the law’s greatest advocates have little hope of anything happening soon because the congressional docket is swamped with weighty and complex issues, such as health care reform.

Instead, they say, consumers must help themselves by monitoring their pension plans carefully and contemporaneously--just as they would watch their investments or savings accounts. It’s much easier to correct an error that’s just happened than to find and fix one that’s festered for 30 or 40 years.

“You should review your 401(k) statements just like you balance your checking account,” says Cindy Hounsell, director of the women’s pension project at the Pension Rights Center in Washington.