Instead Of Investing In New Purchases And Company Growth, Companies Are Using Their Cash To Shore Up Defined Benefit Plans

Monday, February 04, 2013 08:27
Instead Of Investing In New Purchases And Company Growth, Companies Are Using Their Cash To Shore Up Defined Benefit Plans

Tags: economy | Federal Reserve | retirement plans

US companies are being forced to shore up their pension funds with cash as interest rates remain at historic lows.
Funds that normally would use for company growth and purchasing equipment is being poured into the funds as a side effect of the Fed’s monetary stimulus policy designed to reignite the economy.

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Low interest rates can also help companies borrow money at favorable rates and use it to offer consumers discounts.
And when interest rates rise again, companies should see pension shortfalls narrow. They may even become surpluses.
But no one knows when that will happen. The Fed has committed to keeping interest rates low for another two years or until the unemployment rate reaches 6.5%.
Business investment is one of the key measurement tools for economic growth. Pensions became popular after World War II as a mechanism to increase worker compensation without having to raise salaries.
The funds grew as the number of workers in the workplace grew. The 1980s saw them fall out of favor due to their size and the liabilities they represented on company balance sheets.
Companies shifted their plans from defined benefit structures to defined contribution structures, making the plans less expensive to manage and putting the investment management onus on employees.
Some of the largest companies still carry defined benefit plans on their books but, overall, the numbers of companies still carrying the plans is shrinking.
The US Department of Labor says defined benefit plans fell to 46,543 in 2010 from 103,346 in 1975.
Of Fortune 1000 companies, 584 still carried them at the end of 2011, down from 633 in 2004.
Companies are required by law to keep defined benefit plans funded within a certain period of time. The plans have kept workers from accepting offers from other companies, creating worker loyalty.
Now, many of those companies are buying out worker plans or shifting the responsibilities to a third party. The condition of the plans as well as the siphoning of investment money out of the economy are factors that have a bearing on economic growth.

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