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Employer Insolvency Risk1

Employer provided retirement benefits are an important part of retirement security for many.  If the employer has financial problems, employees may lose their jobs, and in some cases, their benefits.

For example, a company that offers a pension plan may find itself unable to remain profitable and be forced to close its doors.  The employees are left trying to find new jobs and wondering what will happen with their pension plan.

In the private sector, benefits are pretty secure with qualified defined benefit plan assets held in an irrevocable trust, subject to minimum finding requirements and guaranteed by the PBGC.  Qualified defined-contribution plans are very secure with the plan assets also held in an irrevocable trust outside of the control of the employer and its creditors.  Executive nonqualified benefits are not as secure, as employees are general creditors in case the company has financial difficulty.

Municipalities are different in that they can file for bankruptcy and ultimately benefit security is based on how the bankruptcy judge prioritizes pension claims.  Benefits in some cases have been reduced.

With state governments, they cannot file for bankruptcy.  Benefit security is tied to state law.  Most give earned benefits a high level of priority if the state has trouble meeting all of its obligations.

1 Retirement Risk Solutions, David Littell, The American College of Financial Services, 2017.

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