Pension De-Risking

39 Pages Posted: 12 Mar 2015  

Paul M. Secunda

Marquette University - Law School

Brendan S. Maher

University of Connecticut School of Law

Date Written: March 12, 2015

Abstract

The United States is facing a retirement crisis, in significant part because defined benefit pension plans have been replaced by defined contribution retirement plans that, whatever their theoretical merit, have left significant numbers of workers unprepared for retirement. A troubling example of the continuing movement away from defined benefit plans is a new phenomenon euphemistically called “pension de-risking.”

Recent years have been marked by high-profile companies engaging in various actions designed to reduce the company’s exposure to pension funding risk (hence the term “pension de-risking”). Some de-risking strategies convert a federally-guaranteed pension into a more risky private annuity. Other approaches convert the pension into cash for the beneficiary, which may be insufficient to provide lasting retirement income. These strategies have raised many concerns that participants are getting the short end of the stick and that pension de-risking is undermining the statutory purpose of ERISA.

Regulators are only beginning to consider ways to appropriately police pension de-risking behavior. We propose that the government should take an aggressive stance in regulating such conduct. Participants as a class should not be made worse off by a pension de-risking transaction, and the relevant de-risking rules should so reflect. More specifically, regulators should (1) encourage desirable forms of de-risking by establishing regulatory safe harbors; (2) require a battery of procedural safeguards for annuitization transactions; (3) require improved disclosures for cash buyouts; and (4) limit cash buyouts when beneficiaries are not likely to meaningfully understand the potentially adverse consequences of trading a pension for cash.

Keywords: pension de-risking, ERISA, IRS, defined benefit plans. DB plans, PBGC, EBSA, annuities, lump sums, lump sum buyouts, retirees, vested terminated employees

Suggested Citation

Secunda, Paul M. and Maher, Brendan S., Pension De-Risking (March 12, 2015). Washington University Law Review, Vol. 93, No. 3, 2016 Forthcoming; Marquette Law School Legal Studies Paper No. 15-07. Available at SSRN: https://ssrn.com/abstract=2577159

Paul M. Secunda (Contact Author)

Marquette University - Law School ( email )

Eckstein Hall
P.O. Box 1881
Milwaukee, WI 53201
United States

Brendan S. Maher

University of Connecticut School of Law ( email )

65 Elizabeth Street
Hartford, CT 06105
United States

HOME PAGE: http://www.law.uconn.edu/faculty/profiles/brendan-s-maher

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