Apparently, large companies are now shifting their pensions into 401Ks managed by financial institutions like Prudential Financial, Inc.
I understand that pensions are guaranteed, but 401Ks are not? Should you be worried if your pension plan just got shifted from a “guarantee” to an investment with “no” guarantee?
Therefore, when many retirees hit the pension payouts, hopefully the investments will be secure and steady for those payouts and not huge loses that reduce their payments. But that’s all up to the investment vehicle risk and the US Federal Government’s appetite for a Pension system bailout in addition to the $102+ Billion already guaranteed by the Pension Benefit Guaranty Corporation of the Federal Government.
Note: According to Wikipedia at the time of this blog post, the PBGC has a total of $102.5 billion in obligations and $79.5 billion in assets.
So, are we creating another class of financial institutions that will become “too big to fail”? Will the CFPB write rules to have their cash reserves or certain protections required to carry those “pension costs”?
10-8-2014: According to a former director of the PBGC, the agency is in debt $27 billion and growing and eventually will need a US Government bailout. And with higher premiums to over the shortage, many companies are offloading their pension obligations to 3rd party financial firms.
10-7-2014: Motorola (as other large employers like Bristol Meyers, General Motors, and Verizon) will be shifting about 35% of its $8 Billion pension liability to an investment firm (in this case Prudential Financial) and another 13% through lump sum pension buyouts. This also removes the backing of the US Government under the Pension Benefit Guarantee Corporation and retirees will lose everything if Prudential goes under.
4-16-2014: Dodd-Frank created the Financial Stability Oversight Council who defined some major insurers (like Prudential, AIG, etc,.) as “systematically important financial institutions” (SIFI’s) which means the Federal Reserve may regulate them – oh boy!
Source: WSJ, 3-25-2014, B1 and WSJ, 3-12-2014, C2, WSJ 4-15-14, A13.