NEW YORK (Dow Jones)--Life has few guarantees, especially for investors, but one of the more certain ones is that you'll receive at least some benefits if you're lucky enough to have a pension.

While some plans received a few black eyes in recent months if they had Lehman (LEH), AIG (AIG) and other financial stocks, pensions are typically well-diversified and prepared for the long term. In the event of a bankruptcy, the Pension Benefit Guaranty Corp., or PBGC, steps in to ensure that private workers receive benefits, and public plans can raise taxes or ask workers to contribute more.

"There really isn't a tremendous amount to worry about," says Alan Glickstein, a senior consultant for Watson Wyatt in Dallas. "Markets have gone up and down but plan funding has improved."

One reason is that when interest rates rise, pension liabilities fall. Additionally, the Pension Protection Act of 2006 has improved the health of plans by, among other things, enabling companies to put more money into the plans when it's available. It also speeds up funding requirements so companies can't fall too far behind.

"In some ways the bigger concern is if you have a 401(k) plan," says Glickstein. "If your balance is down, especially if you're near retirement, you can be in a bit of a bind."

Most American workers don't have a pension plan. In 2004, only 18% of private employees had pensions, compared to 35% in 1980. About 88% of public employees still have pensions.

Fortunately, most plans are adequately funded and prepared for volatility. Even Lehman, which sought bankruptcy protection on Monday, appears to have adequate resources. The Lehman pension had $1.035 billion in assets and $973 million in liabilities, according to the most recent Form 5500 - an annual report that pension and welfare benefit plans must file with the U.S. Department of Labor. The company submitted it on Oct. 15, 2007.

The bigger risk for workers, says Rebecca Davis, a staff attorney at the Pension Rights Center, is that companies would freeze their plans. In recent years, a growing number of companies with healthy, well-funded plans have decided to freeze pensions and offer workers a larger match in their 401(k) plans.

She says that's "a broken promise to participants" who thought they would have a secure retirement in exchange for loyalty to a company.

The problem with a freeze, says Davis, is that benefits remain at their current level. As a result, if someone's plan freezes at age 40, benefits are based on the participant's age and years of service, which typically are significantly lower than at 65.

An increased match doesn't make up the difference, says Davis, because "In a DB (defined benefit) plan you cannot outlive your money."

The majority of public sector workers still receive pensions, but they typically must contribute about 5% to 8% themselves, says Keith Brainard, research director at the National Association of State Retirement Administrators.

"Public pension funds are highly diversified and focus on the long term," he says. "That and other elements of their investment portfolios are designed to enable them to ride out the volatility."

He says that volatility often creates opportunity, especially because pensions are investing long term. State and local pensions must often abide by limits about not investing more than 5% of the portfolio in one equity, and most never come near that amount.

Plan participants "don't have to worry, primarily because the assets that are needed to fund their retirements are there," says Brainard.

If a private sector pension goes under in, say, a bankruptcy, the PBGC, a federal corporation created under the Employee Retirement Income Security Act of 1974, could step in to ensure that workers receive their benefits. It guarantees basic pension benefits for about 44 million workers and retirees participating in 30,000 plans. Since 1974, the PBGC has provided benefits to almost 1.2 million workers and retirees in almost 4,000 terminated plans.

In 2007, it paid about $4.3 billion in benefits in these plans. While more than 80% of workers receive their entire benefit if the PBGC steps in, the maximum guarantee is currently $51,750 a year.

The agency reported a $14 billion deficit at the end of fiscal 2007, which is less than the $18.9 billion deficit of the previous year. The agency has taken over 70 plans so far in 2008, compared with 115 in 2007, says Marc Hopkins, a PBGC spokesman.

      Whether A Plan Is Healthy    

Public-sector employees who participate in a government or employer-sponsored pension plan may find recurring market volatility particularly unnerving, since plan administrators and sponsors are solely responsible for establishing investment risk and portfolio management. The participant doesn't have any discretion over investment options, as is the case with defined contribution plans, such as 401(k) and 403(b) plans.

Ira Marks, a Lawrenceville, N.J., financial planner, says he's been fielding anxious calls from clients during the past several weeks, regarding the health of their employer-sponsored retirement plans, in both the public and private sectors. Public employees, however, shouldn't worry, he says.

In New Jersey, at least, the state bears the risk, he says, and guarantees its employees a set payment, depending on such factors as salary history and length of employment - not the pension fund's overall market performance. However, public employees who voluntarily contribute to a defined contribution plan, such as a 403(b) plan, which allow pre-tax salary deferrals and subsequent tax-deferred growth of those funds, may want to review their investment decisions, says Marks. Defined contribution plans may be state-sponsored, but aren't guaranteed.

Some clients, however, may need the reassurance of investigating the financial health of their pension (defined benefits) plan, whether privately or publicly sponsored.

Lane Carrick, CEO of Sovereign Wealth Management, Inc. and Sovereign Hedge Fund Management, LLC, in Memphis, Tenn., recommends asking the plan administrator for a copy of the plan document, which should include an investment policy statement. The documentation should explain the plan's investment philosophy and may even define limits on the percentage of funds that the plan can invest in various asset classes and securities.

Clients should also review asset disclosure lists that plans usually publish annually, and sometimes quarterly. Call the plan administrator to check up on exposure to higher risk securities, such as credit default swaps, particularly if the plan publishes its disclosure only once a year, says Mike Stanfield, CEO of VSR Financial Services in Overland Park, Kan. Be careful about "window dressing," he cautions.

"When bad news hits the press, they may sell assets," he says. For example, a plan may currently be able to tell you that it's presently not invested in certain types of derivative contracts, but you can find out whether it had owned those instruments by reviewing the year-end disclosure.

"The key question is what percentage of the total portfolio those assets represented," says Stanfield. Even a conservative portfolio can take on a percentage of higher risk securities - as long as they amount to no more than between 2% and 4% of the portfolio, he says. "That's a prudent way to manage money on such a large scale."

Clients who need a more user-friendly approach for investigating their pension plan's health may consult FreeERISA (http://www.freeerisa.com), a free online database of annual reports - Form 5500 - that pension and welfare benefit plans must file with the U.S. Department of Labor. (A $49 annual subscription allows users to also sort by plan type, size and metropolitan region).

"You can't necessarily force change, but I think that people would become comforted if they [reviewed their plan holdings] because they would learn that the plan is very diversified," says Carrick, the Memphis-based advisor. "These are built as business plans to avoid unfavorable outcomes."

(Jilian Mincer is a Getting Personal columnist who writes about personal finance topics including pensions and insurance. She can be reached at 201-938-4042 or by email at jilian.mincer@dowjones.com. Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisors. She can be reached at 201-938-4546 or by email at suzanne.barlyn@dowjones.com.)

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