Pension Risk Matters

The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible. 

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.