Shifting Pension Funds Can Jeopardize Safety
Q: My former employer recently sold its retirement fund to an insurance company for an annuity. I plan to start drawing on my retirement next year and am concerned about its safety. Is it true that a retirement fund is no longer guaranteed by the federal government once a corporation puts the money into an insurance company’s annuity program? --W. F. R .
A: Yes, it’s true.
As you may know, the federal Pension Benefit Guaranty Corp. offers limited protection for a corporation’s pension fund assets, promising to replace some--but not necessarily all--the pension funds lost should the program collapse.
The federal guarantee isn’t meant to protect the company but the individual worker who stands to be severely damaged if left without a pension.
That said, the law still allows a private corporation to terminate its fully funded pension plan and use the plan’s assets to purchase individual annuities for its employees from an insurance company. Your former employer probably had the best motives when it made the transfer.
Administering pension plans is costly and fraught with peril, especially in these times of investment uncertainty. Your former employer probably used its pension fund assets to purchase annuity policies that exactly mirrored the benefits that its retirees stood to receive from its original pension plan.
This eliminated the corporation’s direct involvement with the pension payments.
However, it also ended any government protection the fund might have been entitled to receive. If something goes wrong with your pension payments now, your recourse is against the insurance company. As you might suspect, some consumer groups have been upset about this and have taken the matter to court.
However, the court affirmed that pension funds transferred to independent third parties are no longer covered by federal insurance.
Still, Congress--perhaps once it settles more pressing budgetary problems--has promised to look into the matter. No Deduction on Loss of Promised Interest
Q: I have a certificate of deposit in an institution that has just been acquired. The purchaser has just sent a notice stating that the interest rate on my certificate will be lowered, and I have estimated that this will cost me about $5,000 in lost interest income per year. The certificate does not mature until late 1994. Since the government allows an institution to lower interest rates on certificates when it acquires a troubled S&L;, shouldn’t I be allowed to deduct this lost interest as a loss on my income taxes? --J. A. W.
A: Nice try, but it won’t work. You can’t declare something as a “loss” if you never had it to start with. Remember, you’ve never had that $5,000; all you have is the S&L;’s original promise to pay you that in interest if you purchase the CD. In fact, one can argue that because you will receive less interest on the deposit, you have already gotten a tax break in the form of a lower tax bill because of your lower earnings. (That’s probably not much consolation, however.)
You still have one recourse. Because your S&L; broke the terms of the original certificate by lowering the interest rate, you may not have to abide by the original maturity date. If you move within the required time, you may cash in the certificate--without penalty--and transfer the funds as you wish. You may not have a lot of time in which to make the transfer after being notified of the interest rate change, so quick action is called for. Lawyer Should OK Any Keogh Fund Shift
Q: I have a Keogh account as a self-employed real estate broker. The account is at a savings and loan, but I am interested in opening a self-directed account and investing my funds in second-trust deeds. I would like to be able to designate the properties my account would invest in. Is this possible? --J. C.
A: Yes, but our experts warn that you may find it more trouble and expensive to establish than it is ultimately worth.
For starters, your Keogh plan document must be approved by the Internal Revenue Service. Such documents are readily available at banks, savings and loans, and other investment institutions. But most of these plans are more restrictive than what you want. For example, our experts say many institutions do not allow self-directed Keogh accounts to invest in second-trust deeds, even though the IRS does permit it.
In the end, you may find it necessary to have a lawyer draft a plan individually for you and then guide it through the IRS approval process. This could prove quite costly.
Furthermore, even after you have obtained an approved Keogh plan allowing you to invest in second-trust deeds, you must still abide by laws designed to prevent self dealing and other activity that could pose a potential conflict of interest.
For example, you may discover that your Keogh will be prevented from purchasing a second-trust deed generated by a real estate deal in which you earned a commission.
Before proceeding, you would be wise to consult an attorney.
