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How Pension Outsourcing Could Hurt Your Retirement

Dan Caplinger
December 14, 2012

Around the country, employers have increasingly moved away from pension plans that require them to take responsibility for their workers' retirement benefits. As a result, it's getting extremely rare for younger workers to have access to a traditional pension plan, with the more likely offering being a 401(k) plan that requires workers to take on investment responsibilities.

But the move away from pensions goes beyond changes for new hires. Companies have also taken some dramatic steps to try to make their pensions easier to handle, or when they can, to get rid of having to deal with them entirely.

Verizon's pension outsourcing 
Earlier this week, Verizon (NYSE: VZ) finalized a deal originally announced in October that allowed it to move some of its pension obligations out of its hands. The company's strategy was simple, as it did something that financial planners might well advise a retired client to do: It went and bought an annuity.

Specifically, Verizon transferred $7.5 billion in pension commitments to Prudential (NYSE: PRU), basically buying annuities for the 41,000 former management employees that had been covered under the pension plan. Prudential will take on the responsibility of paying retirees the same benefits they had been receiving directly from Verizon, while Verizon will no longer have to worry about investing pension-fund assets to deliver promised payouts to those workers. All in all, the $7.5 billion represents about a quarter of the assets that Verizon manages for all of its pension obligations.

But the retired workers involved aren't happy about the move. In a lawsuit, they argued that if something happens to Prudential, they'll no longer be covered under the Pension Benefit Guaranty Corporation and could therefore lose their benefits. They also said that Verizon was breaching its fiduciary duty to diversify by concentrating benefits into an annuity o