Pension plans are on fire in 2024, and we don’t mean they’re burning to the ground, but rather exploding.
The largest U.S. corporate pension plans reached 100% funded at the end of 2023, according to a report in Pensions & Investments magazine. That’s great news, especially given the challenges that have led to ups and downs in pension plans in recent years.
The windfall for pension plans is partly due to reduced liabilities, driven by rising interest rates. Pension or defined benefit plans promise a certain amount of money to the retiree. However, some organizations may allow the retiree to choose a lump sum instead. When interest rates are high, lump sums are smaller because there is no need to generate future income for that individual.
So, as higher interest rates have enabled pension plans to become fully funded, some organizations have begun to reconsider how much money they have in reserves to fund their pension plans. They might not need as much cash in the bank.
The trickle-down effect
As interest rates rose, pension plans became more funded, which may lead some companies to change how they manage their pension plan assets.
Household name Eastman Kodak announced last month it would outsource the investment fiduciary functions of its pension plan, which is overfunded by $1.2 billion. The company will now explore how to make the most of that overfunded amount.
While overfunding creates a comfortable and stress-free environment for the funders and the recipients of the pension, it also comes with potential problems.
When a plan is significantly overfunded, the organization could be on the hook for higher income and excise taxes that equal up to 90%. Nobody wants to pay 90% in taxes.
Righting the ship
Organizations with overfunded plans have options to avoid paying higher taxes.
Consider halting contributions to the plan or increasing existing benefits. A firm could also use the excess funds to purchase life insurance for its recipients of the pension plan.
Overall, a fully funded pension plan is an asset, but don’t get caught by its downfalls. Oswald Financial can help you explore the options for your pension plan and how to make the most of any overfunding.
For more information, contact me directly:
Michael Gheen
VP, Director
Oswald Financial, Inc.
216.452.5940
Email
Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, DBA Oswald Financial, an SEC registered investment advisor and separate entity from LPL Financial.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.