NEW YORK -- A reader in Virginia, a widow, recently wrote me a letter about what for her was a doubly tragic loss. At age 59, her husband had died of a heart attack. When she asked his company how large her widow's pension would be, she was told "zero" -- even though he had worked there nearly 30 years.
The company was right. She and her husband had made a mistake in handling his company benefits. They tripped over a point that many employees don't understand: What, exactly, is due a surviving spouse, and how do you go about securing it?
As a spouse, the extent of your protection depends on the kind of pension plan the company has.
Take the classic pension, where the size of your benefit depends mainly on your salary and the number of years you worked (this is called a "defined-benefit" plan).
Many plans allow for a "pre-retirement survivor's annuity." If the worker dies in harness, the spouse will receive a lifetime income. It's worth half of what the worker's benefit would have been had the worker retired early.
Normally, the Virginia widow would have collected this annuity. But she elected to waive that benefit. If you waive it, and the worker lives until retirement, the worker gets a larger pension.
Not knowing about the husband's heart condition, the Virginia couple gambled on skipping the pre-retirement survivor's benefit. But they thought that they were waiving only the pre-retirement benefit. At retirement, they thought that the spouse would be covered, even if she had become a widow.
Not so. If you waive pre-retirement benefits, a surviving spouse loses post-retirement benefits, too.
"If the employee dies," says Peter Elinsky, national director of executive compensation and employee benefits for Peat Marwick, "the pension goes right into the box with him."
So don't waive the pre-retirement benefit if the spouse will need the worker's pension to live on. If you have already waived it and the worker is still alive, the company lets you change your mind.
Defined-benefit pension plans offer yet another form of spouse protection. If the worker dies after retiring, the spouse gets a lifetime income worth at least 50 percent of what the worker was getting, and often 100 percent. That's called a "joint-and-survivor" payout.
The spouse can waive this benefit, too (in writing and notarized). In that case, the worker gets a larger check each month. But when the worker dies, the pension ends. If the worker can take a lump-sum benefit, the spouse has to approve that, too.
It makes sense to waive a joint pension if: (1) the spouse has a good pension of his or her own; (2) the spouse is ill unto death and not likely to outlive the worker; (3) the couple has so much money that the spouse doesn't need the pension to live on.
But if the spouse will need the income, never waive the pension. Once done, you cannot change your mind. And don't accept an insurance policy in place of the pension. Insurance schemes almost never work.
What if your company offers a profit-sharing plan (known as a "defined-contribution" plan)?
If the worker dies before retirement, all of the vested benefits in the account normally go to the spouse. If, at retirement, the worker wants a lifetime income, the pension annuity has to cover both worker and spouse, unless the spouse waives that right.
However, if the plan allows lump-sum distributions, the worker can take all of the money and the spouse has no say. It can be rolled into an Individual Retirement Account or left to the zoo.
Nothing compels the worker to use that money to provide a retirement income for the spouse, although most workers do.
Moral to spouses: Never waive any benefits you might need. And discourage lump-sum withdrawals from pension plans. They're too easy to dissipate.