Article

Bankruptcies, Pensions and the Dodo Bird

Bankruptcies, Pensions and the Dodo Bird

Do you know what happens to former employees who were promised pensions or other benefits when a company goes bankrupt? Like trying to find an extinct Dodo Bird, you might have noticed that company pension plans seem to be disappearing. Tips to consider if you’re offered a lump-sum payment.

July 26, 2022
Bankruptcies, Pensions and the Dodo Bird
Important Disclosure: Content on our website and in our newsletters is for informational purposes only. The information provided may (or may not) directly apply to your situation. We recommend that readers work directly with a professional advisor when making decisions in the context of their specific situation.

When a company announces bankruptcy, employees usually lose their jobs and benefits. But what happens to former employees who were promised pensions or other benefits?

Well, a federal judge ruled that the Westmoreland Coal Company – one of the largest coal companies in the country – could end the health benefits for its former miners and families. And the decision has many retirees worried about their own health care and pensions. And rightly so.

Pensions and the Dodo Bird

Defined benefit pensions, long on the decline, continue to disappear. In fact, according to the Department of Labor, since 1983 US companies have eliminated over 125,000 defined benefit plans.

If you are in one of these traditional pensions, odds are that, sooner or later, you won’t be.

With traditional plans, called defined benefit, employees don’t contribute and companies put away the money for retirees to draw on. Under defined benefit plans, you get paid a specified amount, usually monthly, calculated based on your final salary and your years of service. The onus is on the employer to keep the plan funded, even though the amount needed is fluid and unpredictable, which is one big reason for companies to abandon them.

Why are Pensions Disappearing?

Why are company pensions evaporating? Partly because the Pension Protection Act of 2006 established new accounting rules under which companies with pension plans must recognize their plans’ funded status on their balance sheets each year.

Since analysts and investors scrutinize those balance sheets and lots of pension plans are underfunded, companies decided to take action - because underfunded plans constitute a corporate finance headache.

According to a Towers Watson survey, many companies with pension plans are trying to limit the effect of those plans on their financial statements and cash flows, as well as trying to reduce the overall cost of their plans. And to do that many are simply ditching their plans and giving employees lump sums.

Here’s what to know about your options.

If Offered a Lump-Sum

Why should you object to a wad of retirement cash all at once? Lump sums make sense if you expect to die soon without a surviving spouse who will need lifetime income. They also work if you already have another secure source of retirement income or are trained in handling such amounts of money at once.

In many other cases, accepting a lump sum payout rather than income from a pension may significantly affect your retirement funding unless you take proper steps.

Tips to consider:

  • Take your time. You can’t reverse your decision to take the lump sum.
  • Lump payouts may not include subsidized benefits that some employers offer as an incentive for early retirement.
  • Investing the sum in an immediate annuity might offer steady income into your retirement, but that income often falls short of inflation over time.

As you might after any large windfall, plan with a good financial advisor.

While pension plans are heading toward the same fate as the Dodo bird, your retirement benefits don’t have to.

Other content you may like

  • Stock Performance in Election Years

    Stock Performance in Election Years

    May 23, 2024
    Historical data showing how U.S. stocks have tended to lose money less often in election years, showing the smaller percent of calendar years that lost money, which often tended to be driven by historic economic events, not elections. Included is a glimpse at seasonal stock and bond returns in election years. Also asset classes, inverted yield curve update, high yield bonds environment, and private credit returns.
    Read this Article
  • Carving Up Your Portfolio & Thanksgiving Pie

    Carving Up Your Portfolio & Thanksgiving Pie

    November 23, 2021
    Diversification and Asset Allocation are important financial strategies that may bring many ideas and concepts to mind that aren’t necessarily how these tools are defined in a healthy portfolio. Here are some tips on how to examine your assets and have a more balanced portfolio pie.
    Read this Article
  • Mid-Quarter Roundtable Highlights

    Podcast Highlight - FTX Crypto Currency: Can that happen to my money?

    December 10, 2022
    The team shares insights about the blowup of the “get rich quick” crypto blockchain market and its relation to the established financial market. How is the stock or bond market any different? What can be learned from the volatility of a new asset class forming?
    Read this Article
  • February is a Great Time to File Your Taxes

    February is a Great Time to File Your Taxes

    February 6, 2024
    Here are tax tips to help you make sure your money is working for you, not Uncle Sam. The first step is to start filing as early as you can, making February a great time to receive a refund quickly. There are other options outlined if you owe taxes or cannot make the April 15th deadline, along with ideas on how to avoid penalties and fines.
    Read this Article
  • The link you have selected is located on another server. The linked site contains information that has been created, published, maintained, or otherwise posted by institutions or organizations independent of this organization. We do not endorse, approve, certify, or control any linked websites, their sponsors, or any of their policies, activities, products, or services. We do not assume responsibility for the accuracy, completeness, or timeliness of the information contained therein. Visitors to any linked websites should not use or rely on the information contained therein until they have consulted with an independent financial professional. Please click “Continue to Link” to leave this website and proceed to the selected site.
    phone-handset