Raiding Retirement

Monday, March 2, 2009
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In this recession, many are struggling to deal with the loss of a spouse's income, ballooned mortgages and the student loans of post-college-age children who are unemployed or underemployed.

One way to fund these debts is to get cash or benefit payments out of retirement plans -- while continuing to work for a regular salary. Employees are already starting to negotiate these deals -- at the risk of future security.

For example, employees eligible for early retirement under a very secure DB pension plan may want to begin to receive benefits while staying on the job as an independent contractor. This is pretty common in the public sector, where some pension plans allow full benefits at 50 or 55 years of age and then allow employees to work their jobs as "retired annuitants" at full- or part-time schedules.

This might be a pretty good deal for employers that want to reduce their salary and benefits costs, but not great deals for workers who may lose healthcare benefits and reduce their overall future retirement assets.

Employees who aren't ready to retire but who still have big balances in defined-contribution plans are eyeing those benefits -- even though they have been reduced by half or more by the collapse of the investment markets. Employees facing foreclosure or other loan defaults may actually be asking for workforce-reduction buyouts or layoffs if it means they could get access to lump sums.

Unanticipated beneficiaries may also be coming out of nowhere -- to the chagrin of plan administrators. Earlier this year, the U.S. Supreme Court ruled in Kennedy vs. Plan Administrator for DuPont Savings and Investment Plan that a divorced spouse could accept disbursement from a defined-contribution plan of a deceased ex-spouse even though she had waived beneficiary rights in a divorce decree.

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The suit had been brought by a daughter on behalf of the deceased employee's estate and the ruling was actually in favor of the plan administrator, which had paid the ex-spouse based on a beneficiary form that had not been updated after the divorce. The decision emphasized the need for accurate plan documents and record-keeping procedures.

Even though the employer side won this time, indicating that its own record-keeping was all that was required to meet fiduciary obligations under pension law, the case suggests that, as the economy forces people to hunt for cash, employers can expect to have to resolve more conflicts over who has rights to what in the vast pool of money reserved for retirement.

Len Strazewski can be e-mailed at

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